The Student’s Identities :

1110534003 HANNA DESEASARI

1110534006 YURI ANNISA

Brief Description of the Case and Related Problems:

Entity A has obtained a fixed price contract from ABC Company for $ 8000 million to build a
superhighway between Hong Kong and City B on Mainland China. The initial amount of
revenue agreed in the contract is $8000 million. Entity A’ initial estimate of contract costs is
$7100 million. It will take 3 years to build the superhighway.

- By the end of first year, Entity A’s estimate of contract costs has increased to $7200
million.
- In the second year, ABC Company approves a variation resulting in an increase in
contract revenue of $400 million and estimated additional contract costs of $300
million.
- For the third year, costs incurred include $200 million for standard materials stored at
the site to be used to complete the project.

Entity A determines the stage of completion of the contract by calculating the proportion that
contracts costs incurred for work performed to date bear to the latest estimated total contract
costs. A summary of the financial data during the construction period is as follows :

Year 1 Year 2 Year 3

$ million $ million $ million
Initial amount of revenue agreed in contract 8000 8000 8000
Variation - 400 400
Total Contract Revenue 8000 8400 8400
Contract costs incurred to date 2520 5975 7500
Contract costs to complete 4700 1500 -
Total estimated contract costs 7200 7500 7500
Estimated profit 800 900 900

Arguments (based on the related Standards):

Based on the IAS 11:22 “When the outcome of a construction contract can be estimated
reliably, contract revenue and contract costs associated with the construction contract shall be
recognised as revenue and expenses respectively by reference to the stage of completion of
the contract activity at the end of the reporting period.”

IAS 11:30 explains that The stage of completion of a contract may be determined in a variety
of ways. The entity uses the method that measures reliably the work performed. Depending
on the nature of the contract, the methods may include:

a. the proportion that contract costs incurred for work performed to date bear to the
estimated total contract costs;
b. surveys of work performed; or
c. completion of a physical proportion of the contract work.

Progress payments and advances received from customers often do not reflect the work
performed.

In the IAS 11:31 state that When the stage of completion is determined by reference to the
contract costs incurred to date, only those contract costs that reflect work performed are
included in costs incurred to date. Examples of contract costs which are excluded are:

a. contract costs that relate to future activity on the contract, such as costs of materials
that have been delivered to a contract site or set aside for use in a contract but not yet
installed, used or applied during contract performance, unless the materials have been
made specially for the contract; and
b. payments made to subcontractors in advance of work performed under the
subcontract.

According to IFRS 15, there are some requirements in order to recognize the revenue:

- A company will be able to recognise revenue over time only if the criteria specified in
IFRS 15 are met. In all other cases, a company will recognise revenue at the point in
time when the customer obtains control of the promised good or service.
- A company is required to consider the effects of any significant financing components
in the determination of the transaction price (and thus the amount of revenue
recognized). This may affect long-term contracts in which payment by the customer
and performance of the company occur at significantly different times.
Solution:

1. The stage of completion of the contract by the end of Years 1, 2, and 3 :

First computation:
 contract cost include to date $ 5,975
cost incurred for standard materials stored at the site $ 200 -
Estimated Contract $ 5,775

($200 million is excluded from total cost incurred, because it is the material that will
be use for the year 3).

Second computation
After getting the estimated contract from the first computation, the next step is
determine the stage completion for the Year 2.
estimated contract cost incurred $ 5,775
total estimated contract cost $ 7,500 :
Total $ 0.77
Stage Completion : $0.77 x 100% = 77 %

Third computation:
Because the stage completion of Year 2 already found from the second computation,
we can also determine the stage completion for Year 1 and Year 3 in this step.
1. Year 3
On this year the percentage of stage completion is 100%. Because in this third year
the project is going to be done.
2. Year 2
On this year the percentage of stage completion is 77%. We already found it from the
second computation.
3. Year 1
Stage of completion for Year 1 = Year 3 – Year 2
= 100% - 77%
= 23%

Year 1 Year 2 Year 3

$ million $ million $ million
Initial amount of revenue agreed in contract 8000 8000 8000
Variation - 400 400
Total Contract Revenue 8000 8400 8400
Contract costs incurred to date 2520 5975 7500
Contract costs to complete 4700 1500 -
Total estimated contract costs 7200 7500 7500
Estimated profit 800 900 900
Stage Completion 23% 77% 100%

2. The amount of revenue expenses and profit for each of year 1, 2, and 3
 To date $ Recognized in prior Recognized in
million years $ million current year $
million
Year 1:
Revenue $ 1,840 - $ 1,840
$8,000 x 0.23
Expense $ 1,656 - $ 1,656
$7,200 x 0.23
Profit $ 184 - $ 184
Year 2:
Revenue $ 6,468 $ 1,840 $ 4,628
$ 8,400 x 0.77
Expense $ 5,775 $ 1,656 $ 4,119
$7,500 x 0.77
Profit $ 693 $ 184 $ 509
Year 3:
Revenue $ 8,400 $ 6,468 $ 1,932
$8,400 x 1.00
Expense $ 7,500 $ 5,775 $ 1,725
$7,500 x 1.00
Profit $ 900 $ 693 $ 207
3. The journal entries to account for the contract revenues and expenses for Year 1

Debit Credit
To recognise the contract expenses for Year 1
Contract expenses $1,656
Cash or accounts payable $1,656
To recognize the revenue of contract for Year 1
Cash or due from customer $1,840
Contract revenue $1,840