Long-Term Construction Contracts (LTCC)

➔ Previously governed by PAS 11 (Long-term Construction Contracts), but is now

superseded in IFRS 15

Long-term Construction Contracts

● Obligation of contractor to build a building or any kind of infrastructure
● Obligation of client to to pay the contractor
● Transaction price = contract price (varies/depends on agreement)
● There is an allocation of costs to transaction price
○ In a contract of a construction of building for 5 years, you cannot allocate all
expenses of the construction to the first year of construction

Allocation Methods:
Note: If the problem is silent, use percentage of completion method

1. Percentage of completion
● Recognize revenue based on the percentage of completion
○ Example: If the building is 30% done after the first year of construction,
then recognize revenue for 30% of the construction
● Recognize gross profit or loss every year

2. Zero profit
● Recognize gross profit or loss at the end of the contract period
○ If the contract period and time of construction is for 5 years, no revenue
or loss is recognized in the first to fourth year. Profit or loss is only
recognized in the fifth or last year.
● Exemption: If there is a loss in the year prior to the last year of the contract, you
recognize that under zero profit

Illustration:
Y1 Y2 Y3 Y4 Y5
% of Completion I L I L I or L
Recognized ? Yes Yes Yes Yes Yes

Thus, under percentage of completion, you recognize loss or income every year, from the first
year of the contract up to the last year.

Illustration:
 Y1 Y2 Y3 Y4 Y5
Zero Profit I L I L I or L
Recognized ? No Yes No Yes Yes

Under zero profit, income is only recognized in the last year of the contract; however, even
though before the last year of the contract a loss is incurred, the loss is recognized.

Percentage of Completion Formula:

A. Contract Price
B. Cost to Date = accumulated costs you have incurred in performing your obligation
C. Cost to Complete = estimation of how much more cost is needed to complete the
obligation; every year, cost to complete changes since we accumulate cost every year,
thus, cost to complete decreases
D. Estimated Cost of Completion = Sum of cost to date and cost to complete (B+C)
E. Estimated Gross Profit = Difference of Contract Price and Estimated cost of
Completion (A-D)
F. Percentage of Completion = Quotient of Cost to Date and Estimated Cost of
Completion (B/D)
G. Recognized Gross Profit = Product of Estimated Gross Profit and Percentage of
Completion (E*F)

● The recognized gross profit (G) is what appears in your Statement of Comprehensive
Income.

Construction in Progress (CIP)

● All expenses incurred in the construction of the building/ infrastructure
● Temporary Device Under assets that you will close after the end of the contract period
● Normal Balance: Debit

Cost to date XX
Recognized gross profit XX
Total Construction in Process XX “abono”

Progress Billing = everytime there is progress in construction (20%, 50%), contractor asks
payment from customer “expected kita/revenue na isisingil”

● Compare ending construction in process to progress billing.

● There are times when CIP and Progress Billing are not equal because of timing
differences.
○ If CIP > PB = Contract Asset (“may isisingil pa pero hindi pa tapos buong
obligation”)
■ Under old PAS 11, contract asset is regarded as “Due From”
○ If CIP < PB = Contract Liability (“sobra ang sinisingil”)
■ Under old PAS 11, contract liability is regarded as “Due To”

● There are problems that will provide you both accounts receivable and progress billing.
Between the two, accounts receivable is updated, thus, it is lower as compared to the
progress billing. The difference between the two is the collection.

● In the event that percentage of completion cannot be computed using cost to date over
estimated cost of completion (B/D), you can use this formula:
Percentage of Completion = Construction in Progress/ Contract Price