IAS 11: Understanding Construction Contract Accounting

IAS 11: Construction Contract Accounting

Scope

This Standard applies to accounting for construction contracts in the financial statements of contractors.

A construction contract is specifically negotiated for the production of an asset or group of assets that are closely interrelated or interdependent in terms of design, technology, and function, or in their ultimate destination or use.

A fixed price contract is a construction contract where the contractor agrees to a fixed price or a fixed amount per unit of output. In some cases, these prices are subject to review clauses if costs increase.

A cost plus contract is a construction contract where the contractor is reimbursed for costs defined in the contract, plus a percentage of those costs or a fixed amount.

Contract Costs

Contract costs should include:

• Costs directly related to the specific contract.
• Costs related to contract activity in general, which can be allocated to the specific contract.
• Any other costs that can be charged to the customer under the terms agreed in the contract.

Recognition of Revenue and Expenditure

If the outcome of a construction contract can be estimated reliably, revenue and costs associated with the contract should be recognized with reference to the stage of completion of the contract activity at the balance sheet date.

IAS 11 and Cost Plus Contracts

In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when all of the following conditions are met:

• It is probable that the economic benefits arising from the contract will flow to the contractor.
• The costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably.

When the outcome of a construction contract cannot be estimated reliably:

• Revenue should be recognized in the income statement only to the extent that it is probable the costs incurred by reason of the contract will be recovered.
• Contract costs should be recognized as an expense in the period they are incurred.

Recognition of Expected Losses

When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized immediately as an expense in the income statement for the period.