Chapter 5:

LONG-TERM CONSTRUCTION CONTRACTS (PFRS

15)
Learning Objectives:
 Apply the principles under PFRS 15 to account for revenues
from construction contracts.
 Account for contract costs on construction contracts.
 Account for onerous construction contracts.
 Account for variable consideration, contract modifications, and
other changes in the transaction price of a construction
contract.
 Account for construction contracts wherein the collectability of
contract revenue is uncertain or becomes uncertain.

Start of Discussion

CONSTRUCTION CONTRACT
A contract specifically negotiated for the construction of an asset or a
combination of assets that are closely interrelated or interdependent
in terms of their design, technology and function or their ultimate
purpose or use.

Construction Contract may be either: Cost plus contract

a. Cost plus variable free contract
b. Cost plus fixed contract

Recognition Principle of Construction Revenue√

- When the entity satisfies the performance obligation.

Two Modes:
 Satisfaction over a period of time
1. Percentage of completion
2. Cost recovery method

 Satisfaction at a point in time

-End-
SELF-CHECK TEST:
The Ethan Construction Company was the lowest bidder on a
specialized equipment contract. The Contract bid was P13,125,000
with an estimated cost to complete the project of P7,800,000. The
contract period was 35 months beginning January 1, 2020. The
company uses cost to cost method to estimate profits. A record of
construction activities for the years 2020 to 2022 follows:
REQUIRED:
1. Under the percentage of completion method, how much is the
Construction-in-Progress, net of Progress Billings at December 31,
2021?
2. Under the zero-profit method, how much is the Construction-in-
Progress, net of Progress Billings at December 31, 2021?
3. Under the percentage of completion method, how much is the
realized gross profit/(loss) at December 31, 2022?

2020 2021 2022

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

REQUIRED:
 Using Percentage of completion method, compute for the
following:
1. Realized gross profit in 2020, 2021 and 2022
2. Revenue earned in 2020,2021 and 2022
3. CIP net in 2020,2021 and 2022

 Using Zero-profit method, compute for the following:

4. Realized gross profit in 2020, 2021 and 2022
5. Revenue earned from 2020 to 2022
6. CIP net in 2020,2021 and 2022

On July 1, 2020, ABC Corporation contracted to build an office

building for XYZ Co. for a total contract price of P975,000.

2020 2021 2022

Contract cost
75,000 600,000 1,050,000
incurred to date
Estimated cost
675,000 400,000 -----
to complete
Billings to XYZ 150,000 550,000 275,000