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UNIT VIII
ACCOUNTING FOR LONG TERM CONSTRUCTION CONTRACTS
(PFRS 15 – Revenue from Contracts with Customers)

PFRS 15 – Revenue from Contracts with Customers

Scope
PFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for:
1. Leases contracts (PAS 17)
2. Insurance contracts (PFRS4)
3.  Financial Instruments
4. Nonmonetary exchanges between entities in the same line of business to facilitate sale to
customers.

PFRS 15 Revenue from Contracts with Customers  supersedes PAS11 Construction Contracts

Definitions:

 Contract - An agreement between two or more parties that creates enforceable rights and
obligations. A contract can be written, oral or implied by an entity’s customary business practice.

 Revenue - income arising in the ordinary course of an entity’s ordinary activities.

 Customer - 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.

 Performance obligation
A promise in a contract with a customer to transfer to the customer either:
 a good or service (or a bundle of goods or services) that is distinct; or
 a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.

Core Principle of PFRS 15

 the entity will recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration (payment) to which the entity expects to be entitled in
exchange for those goods or services.

The PFRS 15 revenue model has five steps:

1. Identify the contract with a customer

2. Identify all the individual performance obligations within the contract
3. Determine the transaction price
4. Allocate the price to the performance obligations
5. Recognize revenue as the performance obligations are fulfilled

Summary of Revenue Recognition Principles under PFRS 15
Revenue Recognition
Step 1 - Identify the contract with a
customer
Step 2: Identify the individual
performance obligations
within the contract
Step 3 – Determine the transaction
price.
Step 4: Allocate the transaction price
to the performance obligations.
Step 5: Recognizes revenue when (or
as) a performance obligation
is satisfied or fulfilled.
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The contract is with the customer (and among other things)
the collectability of the consideration is probable.
Each promise to deliver a distinct good or service in the
contract is treated as a separate performance obligation.
A promised good or service is distinct if:
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 promise to transfer the good or service is separately
identifiable from other promises in the contract.
The transaction price is the amount that the entity expects
to be entitled to in exchange for satisfying a performance
obligations.
In most cases the transaction price to be paid will be
stipulated in the contract and quite easy to calculate.
The transaction price is allocated to the performance
obligations based on the relative stand-alone prices of the
distinct goods or services.
 For performance obligations satisfied over time,
revenue is recognized as the entity progress towards
the complete satisfaction of the performance
obligation.
 For the performance obligations satisfied at a point in
time, revenue is recognized when the entity
completely satisfies the performance obligation.
Revenue is measured at the amount of transaction price
allocated to the performance obligation satisfied.
An entity can recognize revenue when performance
obligations have been settled, a performance obligation
has been settled when the customer has received all the
benefits associated with the performance obligation, and
is able to use and enjoy the asset to his or her own
discretion.
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Construction Contracts
 A contract specifically negotiated for the construction of an asset or a combination of assets that
are closely interrelated or interdependent in terms of design, technology and function or their
ultimate purpose or use.

 Generally long term. The date at which the contract is entered into and the date the contract is
completed fall on different financial reporting period. The accounting for construction contracts is
the recognition of the contract revenue and the contract costs.

 Long-term construction contracts frequently provide that seller (builder) may bill the customer at
intervals. The most common examples are as follows:
a. Development of military and commercial aircraft
b. High-rise buildings
c. Skyways, roads and bridges
d. Weapons-delivery system
e. Space exploration hardware

 Include:
a. Contracts for rendering of services which are directly related to construction of the asset, for
example, those services of project managers, architects, and
b. Contracts for the destruction or restoration of assets and the restoration of the environment
following the demolition of assets.

Two –types of Construction Contract or Contract Price

1. Fixed Price contract – a construction contract in which the contractor agrees to a fixed contract
price or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses;

2. Cost-plus Contract - a construction contract in which the contractor is reimbursed for allowable or
otherwise defined costs plus a percentage of these costs or a fixed fee.

Revenue Recognition:

Percentage of Completion Zer0 Profit

Realized Gross Profit    0 0 

Realized Loss      

Revenue ( Current Year) Actual Cost Incurred (CY) plus Actual Cost Incurred (CY) plus
Realized Gross Profit (CY) Realized Gross Profit CY

Construction In Progress Actual Cost Incurred to date Actual Cost Incurred to date
(to date/cumulative as of) plus plus
Realized Gross Profit to date Realized Gross Profit to date
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Percentage of Completion Method

A. Input Measure
a. Cost to cost approach
= Actual Cost Incurred to date + Total Estimated Cost to Complete ( if problem is silent)

b. Effort expended approach

= Actual direct labor hours + Estimated total direct labor hours

B. Output Measure
a. Actual kms + Total Estimated Kms
b. No. of units + Total Estimated Units
c. Engineer’s or Architect’s estimate

Problem: (adapted)
FTR Construction Company was the lowest bidder on a specialized equipment contract. The contract
bid was P 13,125,000 with an estimated cost to complete the project of P 7,800,000. The contract period
was 35 months. The company uses cost to cost method to estimate profits. A record of construction
activities for the years 2018, 2019 and 2020 follows:

2018 2019 2020

Actual cost incurred to date P 6,562,500 P 10,968,750 P 11,625,000
Estimated cost to complete 4,375,000 1,218,750 ---
Progress billings 3,000,000 12,000,000 13,125,000
Cash receipts during the year 5,625,000 3,750,000 3,750,000

A. Using percentage of completion method, compute for the following:

1. The realized gross profit for 2018, 2019 and 2020.
2. The revenue earned in 2018, 2019 and 2020.
3. The Construction in Progress, net in 2019 and 2020.

B. Using Zero profit method ( cost recovery) compute for the following:
4. The realized gross profit for 2018, 2019 and 2020.
5. The revenue earned in 2018, 2019. And 2020.
6. The Construction in Progress, net in 2019 and 2020.
Solution:
A. Percentage of Completion method: (1) The realized gross profit for 2018, 2019 and 2020.
2018 2019 2020
Contract Price 13,125,000 13,125,000 13,125,000
Less: total estimated cost to complete:
Actual cost incurred – current year 6,562,500 4,406,250 656,250
Actual cost incurred – prior year _ 0 6,562,000 10,968,750
Total actual cost incurred to date 6,562,500 10,968,750 11,625,000
Add: estimated cost to complete 4,375,000 1,218,750 ________0
Total estimated cost to complete 10,937,500 12,187,500 11,625,000
Estimated Gross Profit (loss) 2,187,500 937,500 1,500,000
Multiply by percentage of completion 60% 90% 100%
Realized Gross Profit to date 1,312,500 843,750 1,500,000
Less: Realized gross profit (loss) prior year 0 1,312,500 843,750
Realized gross profit (loss) – current year 1,312,500 ( 468,750) 656,250

Note: % of completion = Actual cost incurred to date / total estimated cost to complete.
2018 = 6,562,500/10,937500 = 60% ; 2019: 10,968,750/12,187,500 = 90%
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2. The revenue earned in 2018, 2019 and 2020.

2018 2019 2020
Revenue:
Actual cost incurred current year 6,562,500 4,406,250 656,250
Realized Gross Profit – current year 1,312,500 ( 468,750) 656,250
Revenue 7,875,000 3,937,500 1,312,500

3. The Construction in Progress, net in 2019 and 2020.

2018 2019 2020
Construction in Progress = Revenue to date
Actual cost incurred to date 6,562,500 10,968,750 11,625,000
Realized Gross Profit to date 1,312,500 843,750 1,500,000
Construction in Progress (cumulative) 7,875,000 11,812,500 13,125,000
Progress Billings (cumulative) 3,000,000 12,000,000 13,125,000
Construction in Progress ( net) 4,875,000 (187,5000) 0
(Due from/CA) (Due to/ CL)

B. Using Zero profit method ( cost recovery) compute for the following:
7. The realized gross profit for 2018, 2019 and 2020.
2018 2019 2020
Contract Price 13,125,000 13,125,000 13,125,000
Less: total estimated cost to complete:
Actual cost incurred – current year 6,562,500 4,406,250 656,250
Actual cost incurred – prior year _ 0 6,562,000 10,968,750
Total actual cost incurred to date 6,562,500 10,968,750 11,625,000
Add: estimated cost to complete 4,375,000 1,218,750 ________0
Total estimated cost to complete 10,937,500 12,187,500 11,625,000
Estimated Gross Profit (loss) 2,187,500 937,500 1,500,000
Multiply by percentage of completion 60% 90% 100%
Realized Gross Profit to date 0 0 1,500,000
Less: Realized gross profit (loss) prior year 0 0 0
Realized gross profit (loss) – current year 0 0 1,500,000

8. The revenue earned in 2018 and 2019..

2018 2019 2020
Revenue:
Actual cost incurred current year 6,562,500 4,406,250 656,250
Realized Gross Profit – current year 0 0 1,500,000
Revenue 6,562,500 4,406,250 2,156,250

9. The Construction in Progress, net in 2019 and 2020.

2018 2019 2020
Construction in Progress = Revenue to date
Actual cost incurred to date 6,562,500 10,968,750 11,625,000
Realized Gross Profit to date 0 0 1,500,000
Construction in Progress (cumulative) 6,562,500 10,968,750 13,125,000
Progress Billings (cumulative) 3,000,000 12,000,000 13,125,000
Construction in Progress ( net) 3,562,500 1,031,250 0
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(Due from/CA) (Due to/ CL)

Activity 1: Multiple Choice Problems (adapted)

1. D. Diaz Construction, Inc. has consistently used the percentage of completion meth od of recognizing income. In
2020, Diaz started work on a P 3,000,000 fixed-price construction contract. The accounting records disclosed the
following data for the year ended December 31, 2020.
Cost incurred P 930,000
Estimated cost to complete 2,170,000
Progress billings 1,100,000
Collections 700,000

How much loss should D. Diaz have recognized in 2020?

a) P 230,000 b) P 100,000 c) P 30,000 c) P 0

On January 1, 2020, Brave Construction Corporation began constructing a P 2,100,000 contract. The following are
relevant information provided by the coporation. Brave uses the percentage of completion method. For the year
ended December 31, 2020, Brave Construction billed its client an additional 55% of the contract price.
2020 2021 2022
Construction in progress P 441,000 ? ?
Estimated cost to complete ? ? -
Cost incurred P 425,250 P 969,000 P 675,750
Excess of Construction in Progress P 84,000 current P 330,750 current -
over Billings liability liability

2. How much is the estimated remaining cost in 2020

a) P 1,155,000 b) P 1,584,000 c) P 1,599,750 d) P 1,680,000

3. How much is the realized gross profit (loss) in 2021?

a) P 15,750 b) P 30,000 c) P (45,000) d) P (60,750)

4. How much is the balance of the construction in Progress in 2021?

a) P 1,349,250 b) P 1,365,000 c) P 1,680,000 d) P 2,010,750

5. DM, Inc. works on a P 10,500,000 contract in 2020 to construct an office building . During 2020, DM, Inc.
uses the cost to cost method. At December 31, 2020, the balances in certain accounts were: Construction in
progress – P 3,780,000; Accounts receivable – P 360,000; and billings on construction in process P 1,800,000;
contract retention – P 180,000; mobilization fee – P 140,000. At December 31, 2020, the estimated cost at
completion is P 7,350,000.

The realized gross profit in 2020:

a) P 1,062,500 b)P 1,102,500 c) P 1,134,000 d) P 1,242,500

6. In 2020, Builders, Inc. successfully bid in a contract for factory building at a price of P 13,000,000. Builders,
Inc. uses the percentage of completion method and the following data summarized for this project:
12/31/2020 12/31/2021
Estimated total cost at completion P 9,750,000 10,400,000
Income recognized to date 650,000 1,560,000

What is the contract cost incurred in 2020 assuming cost incurred to measure the extent of progress toward
project completion?
a) P 4,160,000 b) P 4,290,000 c) P 4,550,000 d) P 4,740,000

7. High Construction Company has consistently used the percentage –of-completion method. On January 10, 2020,
ADA began work on a P 6,000,000 construction contract. At the inception date, the estimated cost of
construction was P 4,500,000. The following data to the progress of the contract:
Income recognized at 12/31/2020 P 600,000
Costs incurred 1/10/2014 to 12/31/2021 3,600,000
Estimated cost to complete at 12/31/2021 1,200,000
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How much should ADA recognize for the year ended December 31, 2021?
a) P 300,000 b) P 525,000 c) P 600,000 d) P 900,000
For 8 – 9:

BBB Construction is constructing an office building under contract for Great Cafee. The contract calls for
progress billings and payments of P 620,000 each quarter. The total contract price is P 7,440,000 and BBB
construction estimates total costs of P7,100,000 and that the building will take 3 years to complete and commences
construction on January 1, 2020.

8. As at December 31, 2020, BBB estimates that it is 30% complete with the construction, based on costs incurred.
What is the total amount of revenue from long term contracts recognized for 2018?
a) P 2,480,000 b) P 2,232,000 c) P 2,130,000 d) 620,000

9. What is the balance in the Accounts receivable account assuming Great Cafee has not yet made its last quarterly
payment?
a) P 2,480,000 b) P 2,232,000 c) P 2,130,000 d) P 620,000

for 10 -13:
AFG Company was contracted by RDF, Inc. for the construction a building in 2020. The contract price is
P 15,000,000. AFG shall measure its progress using the cost-to-cost method. Information on the cost is as follows:

2020 2021
Total cost incurred to date P 4,200,000 P 9,860,000
Estimated cost to complete 7,800,000 1,740,000

10. The percentage of completion on December 31, 2020: __________

11. How much revenue is recognized in 2020?

a) P 1,050,000 b) P 5,250,000 c) P 3,000,000 d) none of the choices

12. The percentage completed in 2021: __________________

13. How much is the profit for the year 2021?

a) P 1,840,000 b) 2,890,000 c) P 3,400,000 d) none of the choices

On January 15, 2020, South Builders, Inc. won a bidding to build an athletic stadium. The project was to be built at
a total cost of P 5,500,000 and was scheduled for completion by September 1, 2021. One clause of the contract
stated that the South Builders, Inc. was to deduct P 15,000 from the P 6,600,000 bid price for each week that
completion was delayed. Completion was delayed for six weeks. Data for the three year construction period
follows:
2020 2021 2022
Cost incurred each year P 1,782,000 P 2,068,000 P 1,650,000
Estimated cost to complete 3,618,000 1,650,000 ---
Contract billings each year 1,200,000 1,900,000 ?
Cash collections each year 1,000,000 1,800,000 3,710,000
Operating expenses 100,000 90,000 70.000

__14. What is the net income for the year 2021, using the percentage of completion method?
a) P 248,000 b) P 284,000 c) P 374,000 d) P 743,000

__ 15. Under the Zero Profit method, what is the balance of the Construction in Progress account net of contract
billings as of December 31, 2021?
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a) P 450,000 b) P 520,000 c) P 570,000 d) P 750,000

End

Activity 2: Problem

In 2020, The RDJ Builders Corporation agreed to construct an apartment building at a price of P 4,000,000. The
information relating to the costs and billings for the contract is as follows:

2020 2021 2022

Contract cost incurred to date P 1,120,000 P 2,400,000 P 3,140,000
Estimated cost to complete the contract 2,080,000 800,000 --
Billings to customer each year 1,500,000 1,120,000 1,460,000
Collection of billings each year 1,120,000 1,280,000 1,680,000

During 2021, the customer agrees to a variation with increases expected revenue from the contract by
80,000 and causes an additional costs of P 40,000. At the end of 2021, there are materials stored on site for use
which cost P 32,000 .

REQUIRED: Prepare journal entries under:

1. Percentage of completion method

2. Zero-profit method (cost recovery method), assuming that the contractor cannot estimate the
outcome of the contract with sufficient reliability to estimate the project’s percentage of
completion for 2020 and 2021.