Amara Prabasari

119211078
Accounting IC
Revenue Recognition

CONSTRUCTION CONTRACT
A construction contract is an agreement between a client (buyer) and a contractor (as
a seller) for the construction of an asset or a combination of assets. Construction contractors
create problems in revenue recognition because construction contracts usually require a long
time to complete (more than one year).
With regard to contract prices, construction contracts can be grouped into two, namely:
o Fixed price contracts. A fixed price contract is a construction contract with the
condition that the contractor has agreed to a fixed contract value or a fixed rate per
unit of output.
o Cost plus contracts. A cost plus contract is a construction contract in which the
contactor is reimbursed for costs that have been permitted or determined plus a fee.
Rewards are calculated based on a certain percentage of costs or it can be a fixed
reward.

PRESENTAGE COMPLETION METHOD

The application of the percentage completion method requires that the outcome of a
construction contract be estimated reliably. Accordingly, contract revenue and contract costs
related to construction contracts are recognized as income and expenses with due regard to
the stage of completion of contract activity at the end of the reporting period. This method
provides useful information about the scope of contract activity and performance during a
period.
In the case of a fixed price contract, the outcome of the construction contract can be
estimated reliably if all the following conditions are met:
o Total contract revenue can be measured reliably
o It is probable that the economic benefits associated with the contract will flow to the
entity
o Costs to complete the contract as well as costs that have been incurred until the end of
the financial reporting period can be measured reliably
 o Contract costs attributable to the contract can be clearly identified and measured
reliably so that contract costs can be compared with previous estimates
In a cost plus contract, the result of a construction contract can be estimated reliably if all
the following conditions are met:
o It is probable that the economic benefits associated with the contract will flow to the
entity
o Contract costs attributable to the contract, whether billable or not to the customer, can
be clearly identified and measured reliably
The stage of completion of a contract can be determined in a number of ways. Some of
the methods that can be used to estimate the stage of completion of a contract reliably are:
o Proportion of contract costs to a certain date compared to the estimated total contract
costs
o Survey of completed work
o The completion of a physical part of contract work

PROFIT ZERO METHOD

If the outcome of the contract cannot be estimated reliably, the company cannot apply the
percentage of completion method. In these circumstances, accounting standards state that:
o Revenues are recognized only at expenses incurred, to the extent that these costs are
estimated to be recoverable
o Contract costs are recognized as an expense in the period in which they are incurred