IAS 11

Construction Contracts

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Definitions (IAS 11.3 & IFRIC 15.11)

A contract specifically negotiated for the construction of an asset or a

combination of assets that are closely interrelated or interdependent
Destruction or
restoration
Bridge, dam,
pipeline etc

Refineries
Ships

Services
Buildings directly
related to
construction
of an asset
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Combining & Segmenting (IAS 11.7-10)

CONTRACT CONTRACT Combine

Negotiated as a single package
So closely interrelated that they
are, in effect, a single project
Contracts performed concurrently
or in a continuous sequence

CONTRACT Segment
Separate proposals submitted for
each asset
Each asset subject to separate
negotiation
Cost and revenues for each asset
can be identified
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Contract revenue (IAS 11.11-15)

Is recognised at fair value of consideration receivable

and comprises:
(a) the initial amount of revenue agreed in the contract;
and
(b) variations in contract work, claims and incentive
payments:
(i) to the extent that it is probable that they will result in revenue;
and
(ii) they are capable of being reliably measured.
The uncertainties relating to variations, claims and
incentives result in estimates being made and revised as
events occur and uncertainties are resolved
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Contract costs (IAS 11.16-20)

(a) costs that relate directly to the specific contract eg

site labour, including site supervision;
materials used in construction;
depreciation of plant and equipment used on the contract;
moving plant, equipment and materials to / from the contract site;
estimated costs of rectification and guarantee work

(b) costs that are attributable to contract activity in general and can be allocated to
the contract eg
insurance
design and technical assistance not directly related to a specific contract
construction overheads
borrowing costs

(c) such other costs as are specifically chargeable to the customer under the terms
of the contract.
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Pre-contract costs (IAS 11.21)

Contract costs include the costs attributable to a contract for the period
from the date of securing the contract to the final completion of the
contract.

Pre-contract costs relate directly to a contract and are incurred in

securing the contract
pre-contract costs are also included as part of the contract costs if:
they can be separately identified
measured reliably and
it is probable that the contract will be obtained.

Costs incurred in securing a contract prior to these criteria being met

are recognised as an expense in the period in which they are incurred
they are not included in contract costs when the contract is obtained
in a subsequent period

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Recognition of contract revenue and expenses

When the outcome of a construction contract can be estimated reliably

recognise contract revenue and contract costs by reference to the
stage of completion of the contract activity (percentage of
completion method)
recognise any expected loss on the construction contract as an
expense immediately in accordance with IAS 11.36 (IAS 11.22)

When the outcome of a construction contract cannot be estimated

reliably
revenue shall be recognised only to the extent of contract costs
incurred that it is probable will be recoverable; and
contract costs shall be recognised as an expense in the period in
which they are incurred
recognise any expected loss on the construction contract as an
expense immediately in accordance with IAS 11.36 (IAS 11.32)

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Accounting IAS 11 Appendix examples
Fixed Price Contracts profitable outcome

Use the percentage of completion method if able to reliably estimate

outcome of contract.

Contract 1 P&L
Estimated total revenue 100 Revenue 60
60% Cost of sales (48)
Costs to date 48 Profit 12
Costs to complete 32 Balance sheet
Total estimated costs 80 Gross amounts due 2
from customers for
Stage of completion 60% contract work
Progress billings 58
Payments received 50 Trade receivables (58-50) 8
Gross amounts due from customers for contract work represents
Costs incurred plus recognised profits (48+12); less
The sum of recognised losses & progress billings (0+58).
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Accounting - IAS 11 Appendix examples
Fixed Price Contracts no reliable outcome

If outcome of a contract cannot be estimated reliably no profit should be

recognised.
Contract 2 P&L
Estimated total revenue 100 Revenue 10
Cost of sales (10)
Costs to date 10 Profit -
Costs to complete 60
Total estimated costs 70 Balance sheet
Gross amounts due 10
Stage of completion 10% from customers for
Progress billings - contract work
Payments received -
Trade receivables -
Gross amounts due from customers for contract work represents
Costs incurred plus recognised profits (10+0); less
The sum of recognised losses & progress billings (0+0).
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Accounting - IAS 11 Appendix examples
Fixed Price Contracts loss outcome

If a contract is expected to be loss making, the loss should be

recognised immediately
Contract 3 P&L
Estimated total revenue 100 Revenue 60
60% Cost of sales (72)
Costs to date 72 Balancing figure (8)
Costs to complete 48 Loss (20)
Total estimated costs 120
Balance sheet
Stage of completion 60% Gross amounts due (6)
Progress billings 58 to customers for
Payments received 50 contract work
Trade receivables (58-50) 8
Gross amounts due from customers for contract work represents
Costs incurred plus recognised profits (72+0); less
The sum of recognised losses & progress billings (20+58).
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Disclosures (IAS 11.39-45)

1. Contract revenue recognised in the period

2. Details of methods used to determine contract revenue
recognised in the period
3. Details of methods used to determine stage of completion
of contracts in progress
4. Contract costs incurred & recognised profits to date
5. Gross amount due from customers for contract work as
an asset
6. Gross amount due to customers for contract work as a
liability
7. The amount of advances received
8. The amount of retentions
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Questions

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