IAS 11 –Construction Contract

Objective

 The objective of IAS 11, Construction

Contracts, is to prescribe the criteria for
the accounting of revenue and costs in
relation to construction contracts.

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Definition of Some Key Terms
 Construction contract. A contract
specifically negotiated for the construction
of an asset or combination of assets that
are closely interrelated or interdependent
in terms of their design, technology,
function, or ultimate use or purpose.
 Fixed price contract. A construction
contract in which the contractor agrees to
a fixed price.

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 Cost-plus contract. A
construction contract in which
the contractor is reimbursed for
allowable or defined costs plus
a percentage of such costs or a
fixed fee.

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• Single asset such as a bridge, building,
dam, pipeline, road, ship or tunnel.
• A number of assets which are closely
interrelated or interdependent.

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Recognition of revenue from rendering of services
and from construction contracts (Continued)
Combining and segmenting construction contracts
When a contract covers a number of assets, the construction of each asset
shall be treated as a separate construction contract when:
• separate proposals have been submitted for each asset
• each asset has been subject to separate negotiation and the contractor
and customer have been able to accept or reject that part of the contract
relating to each asset;
• the costs and revenues of each asset can be identified.

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Recognition of revenue from rendering of services
and from construction contracts (Continued)
Combining and segmenting construction contracts (cont’d)
A group of contracts, whether with a single customer or with several
customers, should be treated as a single construction contract when:
• the group of contracts is negotiated as a single package;
• the contracts are so closely interrelated that they are, in effect, part of a
single project with an overall profit margin;
• the contracts are performed concurrently or in a continuous sequence.

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PERCENTAGE OF
COMPLETION METHOD
 The recognition of revenues and expenses by
references to the stages of completion of a
contract is referred to as the percentage of
completion method. The manner in which this
method works is simple: The contract revenues
are matched with the contract costs incurred in
reaching the stage of completion. Such
comparison results in the reporting of revenue,
expenses, and profit that can be attributed to
the proportion of the work completed.

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 IAS 11 recognizes only the percentage of
completion method of recognition of
revenues and expenses. The “completed
contract method” whereby no contract
revenues or profits are recognized until
the contracts are completed or are
substantially complete is not permitted
under IAS 11.

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 The stage of completion of a contract can be estimated by
a variety of means. Depending on the nature of the
contract, an entity may employ the method that measures
reliably the work performed. These include
• The proportion that costs incurred at the balance sheet
date bear to expected total costs required to complete the
contract;
• Certification or surveys of work performed; or
• Completion of physical proportion of the contract work.

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 2004 2005 2006

Costs incurred to date 400,000 935,000 10,70,000

Estimated cost to complete 600,000 165,000 0

Billings to date 300,000 900,000 15,00,000

Collections to date 270,000 810,000 14,25,000

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 Compute the amount of gross profit to be
recognized each year assuming
percentage of completion method
 Prepare all necessary journal entries.

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 An entity shall disclose
(1) The amount of contract revenue recognized as
revenue in the period
(2) The methods used to determine the contract
revenue recognized in the period
(3) The methods used to determine the stage of
completion of contracts in progress at the
balance sheet date
(4) For contracts in progress at the balance sheet
date
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