Since 1977
AFAR
2816 – CONSTRUCTION CONTRACTS
LECTURE NOTES
Sources: IFRS 15 Revenue from Contracts with
Customers, mandatorily effective January 1, 20x4,
replaces
• IAS 11 Construction Contracts
• IFRIC 15 Agreements for the Construction of Real
Estate
• IFRIC 18 Transfers of Assets from Customers
SCOPE & RECOGNITION
IFRS 15 applies to construction contracts only if the
counterparty to the contract is a customer. [IFRS 9.6]
A ‘contract’ is an agreement between two or more
parties that creates enforceable rights and obligations.
Contracts can be written, oral or implied by an entity’s
customary business practices.
A ‘customer’ is a party that has contracted with an
entity to obtain goods or services that are an output of
the entity’s ordinary activities in exchange for
consideration.
Identifying the contract
A contract with a customer is in the scope of IFRS 15
when (1) it is legally enforceable and (2) all of the
following criteria are met [IFRS 9.9]:
(a) the contract is approved and the parties are
committed to their obligations;
(b) rights to goods or services and (c) payment terms
can be identified;
(d) the contract has commercial substance; and
(e) collection of consideration is probable.
If a contract does not meet these criteria, any
consideration received under a contract with a
customer is recognised as a liability until either of
the following events has occurred:
• there are no remaining obligations to transfer
goods or services and all, or substantially all, of the
promised consideration has been received and is
non-refundable; or
• the contract is terminated and the consideration
that has been received is non-refundable.
A contract does not exist if each party to the contract
has the unilateral enforceable right to terminate a
‘wholly unperformed contract’ without
compensating the other party (or parties).
Combination of contracts
An entity shall combine two or more contracts entered
into at or near the same time with the same customer (or
related parties of the customer) and account for the
contracts as a single contract if one or more of the
following criteria are met:
(a) the contracts are negotiated as a package with a
single commercial objective;
(b) the amount of consideration to be paid in one
contract depends on the price or performance of the
other contract; or
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DE LEON/ DE LEON/ DE LEON/ TAN
BATCH MAY 2020
(c) the goods or services promised in the contracts (or
some goods or services promised in each of the
contracts) are a single performance obligation.
Identifying performance obligations
At contract inception, an entity (a) assesses the goods or
services explicitly or implicitly promised in a contract and
then (b) identifies as a separate ‘performance obligation’
each promise to transfer to a customer a ‘distinct’
good or service.
A ‘performance obligation’ is a promise in a contract
with a customer to transfer a ‘distinct’ good or service (or
bundle of goods or services), or a series of substantially
similar distinct goods or services with the same pattern
of transfer to the customer.
Determining whether a good or service is ‘distinct’
A good or service is ‘distinct’ if both of the following
criteria are met:
(a) the customer can benefit from the good or
service* either
• on its own or
• together with other resources that are readily
available** to the customer; and
(b) the entity’s promise to transfer the good or service
to the customer is ‘separately identifiable’ from
other promises in the contract.
*A customer can benefit from a good or service if the
good or service could be used, consumed, sold for an
amount that is greater than scrap value or otherwise held
in a way that generates economic benefits.
**A readily available resource is a good or service
that is sold separately (by the entity or another entity)
or a resource that the customer has already obtained
from the entity (including goods or services that the
entity will have already transferred to the customer
under the contract) or from other transactions or events.
An entity’s promise to transfer a good or service to a
customer is ‘separately identifiable’ include, but are
not limited to, the following:
(a) No significant service of integrating the good or
service (i.e., the good or service is not an input to
be used to produce or deliver the combined output
specified by the customer)
(b) Good or service does not significantly modify or
customise another good or service in the contract
(c) Good or service is not highly dependent on or
highly interrelated with other goods or services
If a promised good or service is not distinct:
→ combine that good or service with other promised
goods or services until it identifies a bundle of
goods or services that is distinct.
In simple terms:
AFAR.2816
EXCEL PROFESSIONAL SERVICES, INC.
At contract inception, an entity
(a) determines what are the goods or services explicitly
or implicitly promised in a contract and
(b) determines whether the nature of the promise is
(1) to transfer each of those goods or services
individually or,
(2) to transfer a combined item or items to which the
promised goods or services are inputs.
Satisfaction of performance obligations
For each performance obligation identified, determine at
contract inception whether it will satisfy the performance
obligation
(a) over time or
(b) at a point in time
Performance obligations satisfied over time
An entity transfers control of a good or service over time
and, therefore, satisfies a performance obligation and
recognises revenue over time, if one of the following
criteria is met:
(a) The customer simultaneously receives and
consumes the benefits provided by the entity's
performance as the entity performs.
(b) The entity's performance creates or enhances an
asset that the customer controls as the asset is
created or enhanced.
• eg constructing an asset on a customer's site
(c) The entity's performance does not create an asset
with an alternative use to the entity and the
entity has an enforceable right to payment for
performance completed to date.
• eg constructing a specialised asset that only the
customer can use, or constructing an asset to a
customer's specification
An asset created by an entity’s performance does
not have an alternative use to an entity if the
entity is either
• restricted contractually from readily directing the
asset for another use during the creation or
enhancement of that asset or
• limited practically from readily directing the asset
in its completed state for another use.
Measuring progress
An entity recognises revenue over time only IF it can
reasonably measure its progress towards complete
satisfaction of the performance obligation.
In circumstances in which it cannot reasonably measure
the outcome, but expects to recover the costs
incurred in satisfying the performance obligation, an
entity recognises revenue only to the extent of the
costs incurred.
Appropriate methods in measuring progress:
• Output method—measures performance based on
the value of the goods delivered relative to those
undelivered. [IFRS 15: B15–B17]
Examples: surveys of performance to date,
appraisals of results achieved, milestones
reached, units delivered and units produced.
• Input method—measures performance based on the
entity’s efforts or inputs towards satisfying the
performance obligation relative to the total expected
inputs. [IFRS 15: B18–B19]
Examples: resources consumed, costs incurred,
labour hours expended and machine hours used.
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Adjustments to the measure of progress
• Exclude from the measure of progress any goods or
services for which the entity does not transfer
control to a customer. Conversely, an entity shall
include in the measure of progress any goods or
services for which the entity does transfer
control to a customer when satisfying that
performance obligation.
• Update the measure of progress to reflect any
changes in the outcome of the performance
obligation.
→ Such changes to an entity’s measure of progress
shall be accounted for as a change in
accounting estimate in accordance with IAS 8.
• When using a cost-based input method adjust the
measure of progress for costs incurred that do not
contribute to the progress of performance.
Examples: significant inefficiencies in performance
not reflected in the price of the contract should
be excluded, such as unexpected wasted
materials or labour incurred.
• When using a cost-based input method adjust the
measure of progress for costs incurred that are not
proportionate to the progress of completion.
→ In those circumstances, the best depiction of the
entity’s performance may be to adjust the input
method to recognise revenue only to the
extent of that cost incurred if:
(i) the good is not distinct;
(ii) the customer is expected to obtain control of
the good significantly before receiving
services related to the good;
(iii) the cost of the transferred good is
significant relative to the total expected
costs to completely satisfy the performance
obligation; and
(iv) the entity procures the good from a third
party and is not significantly involved in
designing and manufacturing the good
MEASUREMENT
When (or as) a performance obligation is satisfied, an
entity shall recognise as revenue the amount of the
‘transaction price’ that is allocated to that performance
obligation.
The ‘transaction price’ is the amount of consideration
to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer,
excluding amounts collected on behalf of third .
The consideration promised in a contract with a customer
may include fixed amounts, variable amounts, or both.
The nature, timing and amount of consideration promised
by a customer affect the estimate of the transaction
price. When determining the transaction price, an entity
shall consider the effects of the following:
(a) Variable consideration
• Examples of variable consideration: discounts,
rebates, refunds, credits, price concessions,
incentives, performance bonuses, penalties,
rights of return and consideration contingent
on the occurrence or non-occurrence of a future
event.
• An entity can only include variable consideration in
the transaction price to the extent that it is highly
probable that a subsequent change in the
estimated variable consideration will not result in
AFAR.2816
 EXCEL PROFESSIONAL SERVICES, INC.
a significant revenue reversal; ie variable
consideration is constrained.
• Variable consideration is estimated as either the
expected value or the most likely amount.
(b) The existence of a significant financing
component in the contract
• Practical expedient: no requirement to reflect
time value of money if the period between
customer payment and the transfer of goods or
services is one year or less.
Changes in the transaction price
A change in the transaction price after contract
inception is allocated to performance obligations on
the same basis as at contract inception.
• Amounts allocated to a satisfied performance
obligation shall be recognised as revenue, or as a
reduction of revenue, in the period in which the
transaction price changes.
A change in the transaction price from a contract
modification is accounted for as a contract modification
[See discussion on Contract Modifications]
CONTRACT COST
Costs to fulfil a contract
Costs that relate directly to a contract Contract modifications
(a) direct labour ;
(b) direct materials;
(c) allocations of costs that relate directly to the
contract or to contract activities (for example, costs
of contract management and supervision, insurance
and depreciation of tools and equipment used in
fulfilling the contract);
(d) costs that are explicitly chargeable to the customer
under the contract; and
(e) other costs that are incurred only because an entity
entered into the contract (for example, payments
to subcontractors).
Costs that are recognized as expenses when incurred the goods or services transferred on or before the
(a) general and administrative costs (unless those
costs are explicitly chargeable to the customer
under the contract);
(b) costs of wasted materials, labour or other
resources to fulfil the contract that were not
reflected in the price of the contract;
(c) costs that relate to satisfied performance
obligations (or partially satisfied performance
obligations) in the contract (ie costs that
relate to past performance); and
(d) costs for which an entity cannot distinguish
whether the costs relate to unsatisfied performance
obligations or to satisfied performance obligations
(or partially satisfied performance obligations).
STRAIGHT PROBLEMS
Exercise 1 Profitable Project (Use PAS 11 & PFRS 15)
The SOLID CONSTRUCTION COMPANY has a 3-year
contract to construct a bridge. The contract price is
P5,600,000. The following data pertain to the construction
period.
20x1 20x2 20x3
Cost to date P1,512,000 4,032,000 4,536,000
Estimated cost to
complete 3,528,000 448,000 - 2. Determine the balance sheet presentation of this
Progress billings
each year 2,240,000 2,240,000 1,120,000
Collections of
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PRESENTATION
When either party has performed → Present as contract
asset or contract liability depending on the
relationship between the entity’s performance and the
customer’s payment
(a) Present the contract as a ‘contract liability’ when
the payment is made or the payment is due
(whichever is earlier)
• If customer pays consideration before the entity
transfers a good or service to the customer, or
• if an entity has a right to an amount of
consideration that is unconditional (ie a
receivable), before the entity transfers a good or
service to the customer
(b) Present the contract as a ‘contract asset’, excluding
any amounts presented as a receivable.
• If an entity performs by transferring goods or
services to a customer before the customer pays
consideration or before payment is due,
(c) Present separately as a’ receivable’ accounted for
under IFRS 9 unconditional right to consideration
ADDITIONAL ISSUES
A ‘contract modification’ is a change in the scope or
price (or both) of a contract that is approved by the
parties to the contract. The modification is approved
when it creates legally enforceable rights and obligations
on the parties to the contract.
Account as a separate contract
• If it add distinct good or services that are priced
commensurate with standalone selling prices.
Account for as termination of existing contract and
creation of new contract
• If the remaining goods or services are distinct from
date of the contract modification.
• The amount of consideration to be allocated to the
remaining performance obligations is the sum of:
(i) the consideration that had not been recognised
as revenue; and
(ii) the consideration promised as part of the
contract modification.
Account for as part of the original contract
• If the remaining goods or services are not distinct
and, therefore, form part of a single performance
obligation that is partially satisfied at the date of the
contract modification.
billings each year 1,960,000 2,240,000 1,400,000
The company uses cost-to-cost percentages in measuring
progress to satisfying performance obligation.
Required:
1. Calculate revenue, cost, and gross profit recognized
each year-end.
contract at ends of 20x1 and 20x2.
3. Prepare all journal entries each year.
AFAR.2816
EXCEL PROFESSIONAL SERVICES, INC.

Exercise 2 Cost of fulfilling contract exceeds contract C 520,000 520,000 520,000 330,000 0
price (Use PAS !! and IFRS 15)
On January 1, 20x3, DIVERSIFIED CONSTRUCTION Required: 1. Calculate the revenue, costs and profit/loss
CORPORATION entered into a 3-year contract to build a for 2020.
dam. The required contract price is P5,529,600 and the 2. Present the balance sheet at the end of 2020.
estimated cost is P4,915,200. The following cost data
relate to the construction activities.

20x3 20x4 20x5 Exercise 4 (Use IFRS 15)

Costs In 20x5, GREATWALL CORPORATION began construction
incurred work under a 3-year contract. The contract price was
each year P1,843,200 P1,603,584 2,374,656 P2,400,000. GREATWALL uses the percentage of
Estimated completion method for financial accounting purposes. The
cost to income to be recognized each year is based on the
complete 3,072,000 2,297,856 0 proportion of cost incurred to total estimated costs for
Billings to completing the contract. The financial statement
customer presentations relating to this contract at December 31,
each year 1,935,360 1,751,040 1,843,200 20x5, follows:
Cash Balance Sheet
collected 1,843,200 1,658,880 2,027,520 Contract receivable – Construction Contracts 51,600

Diversified uses cost-to-cost percentage of completion Contract assets 8,400

method.
Note: Progress billings to date is P147,600.
Required.
1. Compute the Revenue, cost, and gross profit or loss Income Statement
each year. Gross profit on the contract recognized P46,800
2. Determine the balance sheet presentation of the
contract at the ends of 20x3 and 20x4. 1. How much cash was collected in 20x5 on this contract?
3. Prepare all the necessary journal entries. 2. What was the initial estimated total income before tax
on this contract in 20x5?
Exercise 3. (Use IFRS 15) 3. How much was the actual cost incurred in 20x5?
Tripartite Construction Company began operations in 2020. 4. How much was the total cost of the project estimated
Construction activity for the first year follows: at the end of 20x5?
Contract Billings Collections Act. cost Addl cost
Proj Price to date to date to date to compl
A 560,000 360,000 340,000 450,000 150,000
B 670,000 220,000 210,000 126,000 504,000

MULTIPLE CHOICE

1. On January 1, 20x1, an entity accepted a long-term d. Since 60% is the percentage of completion,
construction project to build a condominium at a fixed recognize 60% of loss (i.e., P0.6 million)
contract price of 140 million. The outcome of
performance obligation in connection with this contract 3. Brilliant Inc. is constructing a skyscraper in the heart
cannot be measured reasonably as of year-end. The of town and has signed a fixed price two-year contract
following data are provided by the accountant and for P21.0 million with the local authorities. It has
project manager: incurred the following cost relating to the contract by
the end of first year:
Estimated cost to complete construction project as of • Material cost P5 million
January 1, 20x1, 90,000,000 • Labor cost P2 million
Actual costs incurred as of December 31, 20x1, • Construction overhead P2 million
P45,000,000 • Marketing costs P0.5 million
• Depreciation of the idle plant
and equipment P0.5 million
How much is entity’s gross profit for the year ended
December 31, 20x1? At the end of the first year, it has estimated cost to
a. 30,000,000 c. 25,000,000 complete the contract = P9 million
b. 10,000,000 d. 0 What profit or loss from the contract should Brilliant
Inc. recognize at the end of the first year?
2. Lazy Builders Inc. has incurred the following contract a. P1.5 million (9/18 x 3.0)
costs in the first year on a two-year fixed price b. P1.0 million (9/18 x 2.0)
contract for 4.0 million to construct a bridge c. P1.05 million (10/19 x 2.0)
• Material cost P2 million d. P1.28 million (9.5/18.5 x 2.5)
• Other contract costs (including
• site labor costs) P1 million 4. Mediocre Inc. has entered into a very profitable fixed
• Cost to complete P2 million price contract for contracting a high-rise condominium
building over a period of three years. It incurs the
How much profit or loss should Lazy Inc. recognize in following costs relating to the contract during the first
the first year of the three-year construction contract? year:
a. Loss of P0.5 million prorated over two years • Cost of material P2.5 million
b. Loss of P1.0 million (expensed immediately) • Site labor costs P2.0 million
c. No profit or loss in the year and deferring it to • Agreed administrative costs as
second year per contract to be reimbursed
by the customer P1 million

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EXCEL PROFESSIONAL SERVICES, INC.

• Depreciation of the plant used a. P1.6 m c. P 1.76 m

for the construction P0.5 million b. P1.8 m d. P 1.67 m
• Marketing costs for selling 7. Gross profit realized for 2019 is
apartments when they are ready P1.0 million a. P576,000 c P1,126,400
Total estimated cost of the project = P18 million b. P550,400 d. P 480,000

The percentage of completion of this contract at the

year-end is 8 Revenue earned in 2020 is
a. 33 1/3% (=6.0/18.0) c. 25% (= 4.5/18.0) a. P 5.12 m c. P3.52 m
b. 27% (= 4.5/16.5) d. 39% (=7.0/18) b. P 2.88 m d. P8.00 m
.
5. In November 20X2, an entity contracts with a
customer to remodel a 3-storey building and install
new elevators for total consideration of CU5 million. 9. On January 2, 20x5, QUICKBUILD ERECTORS entered
The promised refurbishment service, including the into contract to construct two projects. The following data
installation of elevators, is a single performance relate to the construction activities.
obligation satisfied over time. Total expected costs are Project A Project B
CU4 million, including CU1.5 million for the elevators. Contract Price 420,000 310,000
A summary of the transaction price and expected costs Cost incurred during 2019 240,000 280,000
is as follows Estimated cost to complete 120,000 40,000
Transaction price 5.0m Billed to customers during
Expected costs: 2019 150,000 270,000
Elevators 1.5m Received from customers
Other costs 2.5m during 2019 120,000 250,000
Total expected costs 4.0m
What amount of gross profit should QUICKBUILD
The customer obtains control of the elevators when ERECTORS report in its 20x5 income statement?
they are delivered to the site in December 20X2, a. ₱40,000 c. ₱30,000
although the elevators will not be installed until June b. ₱31,250 d. None of the choices
20X3. The entity is not involved in designing or
manufacturing the elevators. 10. CIGNAL ERECTORS began operations on January 2,
20x5. During the year, the company entered into a
The entity uses an input method based on costs
contract with TEAM Company to construct a
incurred to measure its progress towards complete
manufacturing facility. At that time CIGNAL estimated
satisfaction of the performance obligation.
that it would take five years to complete the facility at a
As of 31 December 20X2, the total costs incurred cost of P3,937,500. The total contract price for the
(excluding elevators) is CU500,000. construction of the facility is P5,468,750. During the year,
the company incurred P962,500 in construction costs
What is the revenue recognized from this contract?
related to the construction project. The estimated cost to
a. 2.2M c. None
complete the contract is P3,412,500. TEAM was billed and
b. 2.5M d. Some other amount
paid 30% of the contract price subject to a 10% retention

payable together with the last billing after a third party
Rainbow Inc has a P8 million contract started in 2018.
inspected the manufacturing facility.
The following information is provided for the
construction activities.
Using the percentage of completion method, how is the
Years Actual cost to date Addl cost to complete
contract presented in the Balance Sheet?
2018 P1,024,000 P4,096,000
a. P273,437 (contract liability)
2019 3,993,600 2,246,400
b. P273,437 (Contract asset)
2020 6,473,600 0
c. P437,500 (Contract asset)
The company uses cost to cost percentages in
d. P437,500 (Contract liability)
measuring satisfaction of performance obligations.

6. Revenue earned from the contract in 2018

J - end of AFAR.2816 - J

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