PFRS 15:

Long Term Construction

Contract
Learning Objectives
• Apply the principles under PFRS 15 to account for revenue
from construction contract

• Account for contract costs on construction contract

• Account for variable consideration, contract modifications,

and other changes in the transaction price.
a contract specifically negotiated for the construction of

an asset that are closely interrelated in terms of their

design, function or their ultimate purpose or use.

Construction Contract
• Fixed Price Contract

 a construction contract in which the contractor agrees

to a fixed contract price, or a fixed rate per unit output,

which in some cases is subject to cost escalation

clauses.
Construction Contract
• Cost-plus Contract

 a construction contract in which the contractor is

reimbursed for allowable or otherwise defines costs,

plus percentage of these costs or a fixed fee.

Construction Contract
• Construction Contract with Variation
Construction Revenue
The total amount of consideration receivable under the
construction contract

It comprises the following:

 The contract price

 Any subsequent variations in the contract to the extent

that it is probable that they will result in revenue and
they are capable of being measured reliably
QUESTION !
QUESTION !
QUESTION !
Construction Cost
Cost that relate directly to specific contract

Costs that are attributable to contract activity in general

and can be allocated to the contract

Costs that is explicitly chargeable to the customer under the

contract.

Other costs that are incurred only because an entity entered

into the contract such as payments to subcontractors.
Exclusions from construction costs

• general and administrative costs (unless those costs are

explicitly chargeable to the customer under the contract)

• research and development costs for which reimbursement

is not specified in the contract.

• depreciation of idle plant and equipment not used on any

particular contract
Exclusions from construction costs

• costs of wasted materials, labour or other resources to

fulfill the contract that were not reflected in the price of
the contract

• costs that relate to satisfied performance obligations

Accounting for Construction Contracts

Can be estimated Percentage of

reliably Completion
Outcome of the
contract

Cannot be Zero Profit Method

estimated reliably
A. Percentage of Completion ( Overtime)

Customer simultaneously receives and consumes all of the benefits

The entity creates an asset controlled by the customer

The entity’s performance does not create an asset with an

alternative use to the entity and it has an enforceable right to
payment for the performance completed to date

B. Cost Recovery Method/ Zero Profit Method ( Point in Time)

QUESTION !
A. Percentage of Completion ( Overtime)

10 X
Methods of Measuring Progress
9 X
• Output Methods
8 X
 Engineer’s (or architect) method
7 X
6 X
5 X
4 X
3 🗸
2 🗸
1 🗸
A. Percentage of Completion ( Overtime)

Methods of Measuring Progress

Prior Period Construction Costs incurred xx
• Input Methods
 Cost-to-cost Approach Current Period Construction Costs incurred xx

Construction Costs incurred to Date xx

Percentage of Construction Cost Incurred to Date

Completion = Estimated Total Construction Cost

xx
Construction Costs incurred to Date
Estimated Cost to Complete xx

Estimated Total Construction Cost xx

Presentation
Contract Asset = excess of Construction
in Progress over Progress Billings

Contract Liability = excess of Progress

Billings over Construction in Progress
Construction in
Progress presented net of each other
(Progress Billings)
Net of CIP or Net of PB

CIP
Cost XX Loss XX

Gross Profit XX
QUESTION !
QUESTION !
 Cost-to-cost ( Percentage of Completion Method)

Step 1: Identify the contract with a customer.

The contract is a construction contract.

Step 2: Identify the separate performance obligations within a

contract.
The performance obligation is to construct a large office building
for JK Towers.

Step 3: Determine the transaction price.

The Transaction Price is P5,000,000
 Cost-to-cost ( Percentage of Completion Method)

Step 4: Allocate the transaction price.

With only one performance obligation, VVL allocates the entire
transaction price to the construction of office building.

Step 5: Recognize Revenue when (or as) each performance

obligation is satisfied.
Journal Entries
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Presentation
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Additional Problems
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