Transcript Document

AS 7: CONSTRUCTION CONTRACTS
By
Sunil Wadhwani
Ajay Wadhwani
17-07-2015
Contents
 Objective
 Applicability
 Definition of Construction Contract
 Concept of Combining & Segmenting
 Recognition of Contract Revenue and cost
 Determination of stage of completion
 Calculation of Profit & Loss
 Disclosure Requirements.
OBJECTIVE
 Accounting Treatment for Contract Revenue
 Allocation of Contract Cost
APPLICABILITY
 Applies to the contracts of which start date and
end date is falling in the different accounting
periods.
 Applies to Contractor for all contracts
 Except : The construction activity is undertaken on
its own account as a commercial venture.
 This Standard is not applicable to Builder.
CONSTRUCTION CONTRACT
 Construction of single Asset
 Combination of Inter-related and inter-dependent
Assets
 Rendering of services which are directly related to
construction of Assets
 Destruction or restoration of assets
COMBINING & SEGMENTING
o COMBINING
o SEGMENTING
 Negotiated as a Single
 Separate proposal for
package
 Interrelated and part
of single project with
an overall profit
margin
 Performed
concurrently or in
continuous sequence.
each Asset
 Subject to separate
negotiation and option
to accept or reject any
contract
 Cost and Revenue of
each asset can be
identified
CONSTRUCTION OF ADDITIONAL ASSET
 Will it be a separate contract or part of existing
contract???
 Separate contract if
Asset differs significantly as compare to original
contract
II. Price of Additional Contract is independent of
original contract.
I.
RECOGNITION OF CONTRACT REVENUE AND COST
Whether Outcome of contract
can be estimated reliably
YES
Recognize Revenue & cost in
proportion to the work
completed
NO
Revenue should be recognized
to the extent of cost incurred if
it is realizable
Total estimated cost on completion > Total Contract revenue
Full loss should be recognized immediately irrespective of completion stage
RECOGNITION OF CONTRACT REVENUE AND COST
 Contract Revenue ???
 It comprises of :
The initial amount of revenue as agreed in the
contract
II. Variations in contract work,
Claims &
Incentive payments.
I.
RECOGNITION OF CONTRACT REVENUE AND COST
 Variations:- It is an instruction by the customer for a
change in the scope of the work.
 Claims:- It is an amount that the contractor seeks to
collect from the customer or another party as
reimbursement for costs not included in the contract
price.
 Incentive Payments:- It is an additional payment to
be paid to the contractor if the specified performance
standards are met or exceeded.
RECOGNITION OF CONTRACT REVENUE AND COST
 Contract Costs ???
 It comprises of
1. Costs directly related to specific contract.
Sr. no. Type of Cost
a.
Site Labour cost including site super-vision
b.
Cost of material
c.
Depreciation of Plant used in the contract
d.
Transshipment cost of plant, equipment and materials to and from
contract site
e.
Cost of Hiring plant and machinery
RECOGNITION OF CONTRACT REVENUE AND COST
2.
Costs that are in general and can be allocated to the contract
Sr. no.
Type of Cost
1.
Insurance
2.
Cost of designs and specification not directly related to contract
3.
Construction overheads
4.
Portion of general administrative overhead chargeable to the contract as
per agreement.
 Expenses not included in the contract
Sr. no
Type of Cost
1.
General administration expenses not to be reimbursed by the customer
2.
Selling Cost
3.
Research and development costs reimbursement of which is not
specified in the contract
4.
Depreciation of idle plant and equipment.
DETERMINATION OF STAGE OF COMPLETION
1.
Stage of completion= Costs incurred up to reporting date
Total Estimated Costs
E.g. = 15 cr / 25 crore(15 +1o)
= 3/5th
2.
Surveys of work performed;
3.
Completion of physical proportion of contract work.
CALCULATION OF PROFIT & LOSS
 Step-1 Calculate Revenue to be Recognized
Revenue to be recognized
Till date
=
Total Revenue as per contract X [%] stage of
completion
 Step-2 Calculate Profit/ Loss Till date
Profit /Loss Till
date
Revenue to be
recognized Till date
=
Cost recognized till date
-
 Step-3 Calculate current year profit/Loss
Current Year
Profit/ Loss
=
Profit/Loss
Till Date
- Profit Previously
recognized
-
Expected
Loss
DISCLOSURE REQUIREMENTS
 Contract revenue:
 Revenue recognized
 Method used
 Basis to determine stage of completion
 Contracts in progress:
 Aggregate amount incurred and recognized
 Advances received
 Retentions
 Amounts due from or to the customers.
CA. Ajay Wadhwani 9730215378
Sunil Wadhwani
7709912344