IAS 11: Construction
Contracts
Background

Effective for periods beginning on or after 1
January 1995

Prior to that revenue was recognised at the
completion of contract and costs were recognised
when incurred

This caused a conflict , not in line with the accrual
method

Was excessively prudent
Objective
To prescribe the accounting treatment of revenue
and costs associated with construction contracts.

Contracts are seldom completed within a financial
period

Hence IAS11 prescribes the method of recognising
the costs and revenues attributable to a specific
contract

Adopts the accrual method of accounting
Construction contract
Is 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 (contd.)
Construction contracts include contracts for:
•
Rendering of services directly related to the
construction of the asset (i.e., for project
managers and architects); and
•
The destruction or restoration of assets, and
the restoration of the environment following
the demolition of assets.
Types of Contracts
Fixed price contract: is a construction contract in
which the contractor agrees to a fixed contract price,
or a fixed rate per unit of output, which in some
cases is subject to cost escalation clauses.
.
Types of Contracts
Cost-plus contract: is a construction contract in
which the contractor is reimbursed for allowable or
otherwise defined costs, plus a percentage of these
costs or a fixed fee.
•
A contract may be a single contract e.g.
construction of a bridge or dam and can be a
contract for a series of contracts, which are closely
interrelated or interdependent in terms of design,
technology or construction.
Contract Revenue
•
•
the initial amount of revenue agreed
in the contract; and
variations , claims and incentive
payments:
‐ to the extent that it is probable that
they will result in revenue; and
‐ they can be reliably measured.
Contract revenue measurement

Contract revenue is measured at the fair value
of the consideration received or receivable.

The measurement of revenue is affected by a
variety of uncertainties that depend on the
outcome of future events.

These estimates are revised as and when the
events occur and impact on the revenue to be
recognised in the different financial periods
over the life of the contract
Contract revenue measurement
Variations are included in the revenue when:

it is probable that the customer will approve the variation/amount of revenue
arising from variation; and

the amount of revenue can be measured reliably.
Claims are included in the revenue only when:

negotiations have reached the advanced stage and it is probable that the
customer will accept the claim; and

the amount probable to be accepted by the customer can be measured reliably.
Incentive payments are included in the revenue when:

the contract is sufficiently advanced that it is probable that the specified
performance standards will be met or exceeded; and

the amount of incentive payments can be measured reliably.
Contract costs
•
costs that relate directly to the specific contract e,g
labour, materials, supervision
•
costs that are attributable to contract activity in
general and can be allocated to the contract; and
•
such other costs as are specifically chargeable to
the customer under the terms of the contract.
•
Cost of rectification after completion
Contract costs (contd.)
Contract costs do not include the following:
 General
administration costs (unless
reimbursement is specified in contract);
 Selling costs;
 R&D costs (unless reimbursement is
specified in contract); and
 Depreciation of idle plant and equipment
not used on any particular contract.
Contract costs measurement

Generally contract activity costs should be allocated
systematically and rationally, and all costs with similar
characteristics should be treated consistently. The
allocation should be based on the normal level of
construction activity.

When it is probable that total contract costs will exceed total
contract revenue, the expected loss shall be recognised as
an expense immediately.
ACCOUNTING TREATMENT
Percentage of completion method
When the outcome of a contract can be estimated
reliably, the contract revenue and costs should be
recognised according to the stage of completion of the
contract.
The percentage of completion method is an
application of the accruals assumption. Contract
revenue is matched to the contract costs incurred in
reaching the stage of completion, so revenue, costs
and profit are attributed to the proportion of work
completed.
Percentage of completion method
(Cont’d.)
We can summarise the treatment as follows:
•
•
•
•
•
Recognise contract revenue as revenue in the accounting periods in
which the work is performed;
Recognise contract costs as an expense in the accounting period in which
the work to which they relate is performed;
Any expected excess of total contract costs over total contract revenue
(ie a loss) should be recognised as an expense immediately;
Any costs incurred which relate to future activity should be recognised as
an asset if it is probable that they will be recovered (often called
contract work in progress, ie amounts due from the customer); and
Where amounts have been recognised as contract revenue, but their
collectability from the customer becomes doubtful, such amounts should
be recognised as an expense, not a deduction from revenue.
Determining the stage of completion
How should you decide on the stage of completion of any
contract?
IAS 11 gives 3 methods:

Proportion of contract costs incurred for work carried
out to date;
Costs to date/Total estimated costs

Surveys of work carried out
Work certified/Contract price

Physical proportion of the contract work completed
Contract outcome predictability
When the contract's outcome cannot be predicted reliably:
•
only recognise revenue to the extent of contract costs
incurred which are expected to be recoverable; and
•
recognise contract costs as an expense in the period they
are incurred.
This no profit/no loss approach reflects the situation near
the beginning of a contract, ie the outcome cannot be reliably
estimated, but it is likely that costs will be recovered.
Recognition of expected losses
Any loss on a contract should be recognised as
soon as it is foreseen. The loss will be the amount
by which total expected contract revenue is
exceeded by total expected contract costs.
The loss amount is not affected by whether work
has started on the contract, the stage of completion
of the work or profits on other contracts (unless they
are related contracts treated as a single contract).
Changes in estimates
The effect of any change in the estimate of contract
revenue or costs or the outcome of a contract
should be accounted for as a change in
accounting estimate under IAS 8 Accounting
policies, changes in accounting estimates and
errors.
Example
A contract is started on 1 March 2016 and is due for completion on 31 December
2017
•
Contract value of $1,500,000
•
Costs incurred for the year ended 31 December 2016 amount to $600,000
•
Certified work as at 31 December 2016 is $750,000
•
It is estimated with certainty that costs to completion amount to $600,000
or $1,000,000
What is the contract revenue and profit to be recognised in the financial
statements for the year ended 31 December 2016
Disclosure
An entity must disclose the following in the notes to
the financial statements:
•
The methods used to determine the contract
revenue recognised in the period;
•
The amount of contract revenue recognised as
revenue in the period;
•
The method used to determine the stage of
completion of contracts in progress;
Disclosure
•
The gross amount due from the customers for
contract work as an asset; and
•
The gross amount due to the customers for
contract work as a liability.
Disclosure
Further disclosure is required for:
Contracts in progress at the end of the reporting
period, show the following:
•
Total costs incurred plus recognised profits (less
recognised losses) to date;
•
Advances received;
•
Retentions (progress billings not paid until the
satisfaction of certain conditions); and
Disclosure
•
Any contingent gains or losses, eg due to
warranty costs, claims, penalties or possible
losses, should be disclosed in accordance with IAS
37 Provisions, contingent liabilities and contingent
assets.
IFRS 15: Revenue from Contracts
with Customers
Background
As a result of the issuance of IFRS 15, the following existing
requirements in IFRSs have been superseded:
•
IAS 11 Construction Contracts;
•
IAS 18 Revenue;
•
IFRIC 13 Customer Loyalty Programmes;
•
IFRIC 15 Agreements for the Construction of Real Estate;
•
IFRIC 18 Transfers of Assets from Customers; and
•
SIC-31 Revenue – Barter Transactions Involving
Advertising Services.
Effective date

Effective for periods beginning on or after 1 January 2018

Early adoption is permitted
.
END