General Purpose Financial Reporting in Hong Kong
Questions & Answers
SSAP 23, Construction Contracts
Background
SSAP 23 came into effect for financial statements covering periods beginning on or after 1 January 1999.
Questions and answers on SSAP 23 appear below.
Contents
Reference
Topic
Page
SSAP 23.21-1
Percentage of Completion method – Example when the outcome of the construction
contract can be estimated reliably .......................................................... 2
Disclaimer
Please note that this document is intended for general guidance only and is subject to the Hong Kong
Society of Accountants (HKSA) Staff Policy on Handling Technical Queries, posted on the HKSA website
at: http://www.hksa.org.hk/professionaltechnical/policy/techqs.pdf. Accordingly, the material in this
document represents the personal views of the authors and does not constitute an authoritative
pronouncement on behalf of the HKSA or the HKSA’s Financial Accounting Standards Committee. The
HKSA and the authors do not accept any responsibility whatsoever for any accounting treatment and/or
the auditing or professional procedures applied on the basis of this document. The contents of this
document, which is subject to change from time to time, shall not be permissible as evidence in connection
with any investigation or disciplinary proceedings of the HKSA or other legal proceedings.
Feedback welcomed
We welcome your comments and feedback. Comments and suggestions on the material in this document
should be addressed to Mr. Simon Riley, Deputy Director – Accounting, Hong Kong Society of
Accountants, e-mail: commentletters@hksa.org.hk.
Relevant links
SSAP 23.. http://www.hksa.org.hk/professionaltechnical/pronouncements/handbook/volume2a/2_123.htm
Summary of SSAP 23 ...... http://www.hksa.org.hk/professionaltechnical/accounting/standards/ssap23.pdf
HKSA Financial Reporting home page........... http://www.hksa.org.hk/professionaltechnical/accounting/
Reference materials page .............. http://www.hksa.org.hk/professionaltechnical/accounting/rm
Updated 3-Oct-2003
SSAP 23, Construction Contracts
Page 1 of 4
General Purpose Financial Reporting in Hong Kong
SSAP 23.21-1
Questions & Answers
Percentage of Completion method – Example when the outcome of the
construction contract can be estimated reliably
Q: In 20X3, A Ltd enters into a contract to construct some leisure facilities. The project is expected to
be completed in 20X4. The contract price is $10,000,000 and other information relevant to the
construction contract is as follows:
Year ended 31 December
20X3
$’000
20X4
$’000
Actual costs incurred
Estimated costs to completion
Billings presented
Collections received
3,600
5,400
3,000
2,500
5,700
—
7,000
7,500
A Ltd measures the stage of project completion by reference to the proportion of contract costs
incurred for work performed to date against estimated total contract costs [SSAP 23 paragraph
29(a)].
(1) What is the construction contract profit or loss to be recognised for the project for the years
20X3 and 20X4?
(2) What are the journal entries to be recorded for the project for the years 20X3 and 20X4?
(3) What is the effect on the income statement and balance sheet from the construction project for
the years 20X3 and 20X4?
A: (1) Profit or loss
Contract price
Estimated total costs
Cumulative profit/(loss)
Percentage of completion
20X3: 3,600/9,000
20X4: 9,300/9,300
Contract profit/(loss)
20X3: 40% x 1,000
20X4: 100% x 700
less recognised previously
For current period
Updated 3-Oct-2003
20X3
$’000
20X4
$’000
10,000
9,000
10,000
9,300
1,000
700
%
40
%
100
$’000
400
$’000
—
700
400
400
300
SSAP 23, Construction Contracts
Page 2 of 4
General Purpose Financial Reporting in Hong Kong
Construction revenue
20X3: 40% x 10,000
20X4: 100% x 10,000
less recognised previously
Questions & Answers
4,000
Construction costs
—
10,000
4,000
4,000
6,000
3,600
5,700
(2) Journal entries
$
20X3
Dr
Cr
Construction in progress
Cash/liabilities for materials,
payroll, Sub-contractors, etc
(to record cost of construction)
3,600,000
Dr
Accounts receivable
Cr
Progress billings
(to record progress billings)
3,000,000
Dr
Cash
Cr
Accounts receivable
(to record cash collection)
2,500,000
Dr
Construction costs
Dr
Construction in progress
Cr
Construction revenue
(to recognise construction revenue)
3,600,000
400,000
3,600,000
3,000,000
2,500,000
20X4
Dr
Cr
4,000,000
Construction in progress
Cash/liabilities for materials,
payroll, Sub-contractors, etc
(to record cost of construction)
5,700,000
Dr
Accounts receivable
Cr
Progress billings
(to record progress billings)
7,000,000
Dr
Cash
Cr
Accounts receivable
(to record cash collection)
7,500,000
Dr
Dr
Cr
5,700,000
300,000
5,700,000
7,000,000
7,500,000
Construction costs
Construction in progress
Construction revenue
Updated 3-Oct-2003
$
SSAP 23, Construction Contracts
6,000,000
Page 3 of 4
General Purpose Financial Reporting in Hong Kong
Dr
Progress billings
Cr
Construction in progress
(to record completion of the contract)
Questions & Answers
10,000,000
10,000,000
(3) Effect on income statement and balance sheet
Income Statement
20X3
$’000
20X4
$’000
Construction revenue
Construction costs
4,000
3,600
6,000
5,700
400
300
20X3
$’000
20X4
$’000
3,600
400
(3,000)
9,300
700
(10,000)
Gross profit/(loss)
Balance Sheet
Construction in progress
costs incurred
add attributable profit
less progress billings
Accounts receivable
Updated 3-Oct-2003
1,000
—
500
—
SSAP 23, Construction Contracts
Page 4 of 4