INSTRUCTIONS: ANSWER USING THE FOLLOWING FORMAT:

1. ARIAL 11, JUSTIFIED ALIGNMENT, SINGLE SPACING

2. DO NOT JUST COPY AND PASTE YOUR ANSWERS FROM THE INTERNET. TRY
PARAPHRASING THE STATEMENT TO MAKE IT EASIER TO UNDERSTAND AND
SHORTER TO VERIFY.
3. USE THIS FOR FILE NAME: A6_FIRSTNAME_COSNTRUCTIONCONTRACTS
EXAMPLE: A6_ALRAJIV_CONSTRUCTIONCONTRACTS

1. WHAT IS LONG-TERM CONSTRUCTION CONTRACTS? ELABORATE AND GIVE

EXAMPLES OF LOCAL CONSTRUCTION CONTRACTS. DISCUSS THE ACCOUNTING
STANDARDS GOVERNING IT.
ANSWER: A long term construction contract refers to contract under which construction work extends
beyond one year of accounting period. It is a contract specifically negotiated for the construction of an
asset or a group of interrelated assets. Examples of local construction contracts are construction of dam,
tunnels, bridges, skyways, roads and etc. The accounting standards governing construction contracts are
PAS11 and PFRS 15.

PAS 11 Construction Contracts 01/01/05

This Standard prescribes the accounting treatment of revenue and costs associated with construction
contracts. Because of the nature of the activity undertaken in construction contracts, the date at which
the contract activity is entered into and the date when the activity is completed usually fall into different
accounting periods. Therefore, the primary issue in accounting for construction contracts is the
allocation of contract revenue and contract costs to the accounting periods in which construction work
is performed. This Standard uses the recognition criteria established in the Framework for the
Preparation and Presentation of Financial Statements to determine when contract revenue and contract
costs should be recognized as revenue and expenses in the income statement. It also provides practical
guidance on the application of these criteria.
IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring
such entities to provide users of financial statements with more informative, relevant
disclosures. The standard provides a single, principles based five-step model to be applied to all
contracts with customers.

2. WHAT ARE THE CONSIDERATIONS TO RECOGNIZE ONE AS ADDITIONAL CONTRACT

REVENUE? GIVE SOME EXAMPLES OF ADDITIONAL CONTRACT REVENUES.
ANSWER: According to the book of Guerrero, the recognition of additional contract revenue
relating to claims is appropriate if it is probable that the claim will result in additional revenue and if the
amount can be estimated reliably. If this is the case, revenue from a claim should be recorded only to
the extent that contract costs relating to the claim have been incurred. Otherwise, a contingent asset for
the claims should only be disclosed.
CPAR Answer: Additional revenues may be recognized by the constructor under the following
considerations:

 To the extent that it is probable that they will result in revenue They are capable of being
reliably measured.

Examples:

 Variation in contract work as instructed by the customer regarding the scope of work to be
performed.
 Claim that the contractor may seek to collect from the customer caused delays or errors in
specification or design.
 Incentive payments to be paid to the contractor if specified performance standards are met
or exceeded or for early completion of the contract.

3. What are the variety of means a stage of completion can be estimated?

Dayag pg 290
ANSWER: Input & Output

4. HOW SHALL THE CONTRACTOR PRESENT IN ITS STATEMENT OF FINANCIAL

STATEMENTS THE ACCOUNTS RELATED TO CONSTRUCTION CONTRACT?
Dayag pg 294 and 298
ANSWER: The contractor shall present in its statement of financial statements as an asset the
gross amount due from customers for contract work which is the net amount of cost incurred
plus recognized profits less the sum of recognized losses and progress billings for all contracts
in progress for which costs incurred plus recognized profits or less recognized losses exceeds
progress billings. Meaning, it is presented as an asset if construction-in-progress exceeds
progress billings.
On the other hand, it shall present as a liability the gross amount due to customers for contract
work is the net amount of cost incurred plus recognized profits less the sum of recognized
losses and progress billings for all contracts in progress for which progress billings exceeds cost
incurred plus recognized profits or less recognized losses. Meaning, it is presented as a liability
if progress billings exceed construction in progress.
But take note that the assets and liabilities resulting from the difference of construction inn
progress and progress billings shall not be netted or offsetted in the statement of financial
position.
WILEY Answer: Contracts should be separated into net assets and net liabilities. a. Current
assets include costs and income (loss) in excess of billings. b. Current liabilities include billings
in excess of costs and income (loss). c. Contracts should not be offset on the balance sheet.
5. WHEN THE COMPANY DECIDES TO CHANGE ITS ACCOUNTING FOR CONSTRUCTION
CONTRACTS FROM PERCENTAGE OF COMPLETION TO COST RECOVERY METHOD.
HOW SHALL THE ACCOUNTING CHANGE BE TREATED?
ANSWER: It shall be accounted for as a change in accounting policy or accounting principle and
the accounting treatment would be retrospective application or with cumulative effect in the
beginning retaining earnings at the date of change.

The accounting changes shall be treated retrospectively instead of prospectively by the long-
term construction contractor.