Construction Contract IAS 11

[Asif]

Look Carefully in the question how the stage of completion is calculated.

Usually it is calculated in the following two ways :

Cost is the base
cost to date
-----------x 100
total cost

survey/work certified is the base

work certified/sales value
------------------------ x 100
contract price

The above formula to the formula are needed to find the stage of completion and stage of completion are needed to find the the sales recognized and cost recognized.

> Please note that inventory inventory cannot be included in cost to date, if included deduct the inventory from cost of date and include them in Inventory is and base and also closing inventory in the I/S.

> Any unexpected expense e.g. rectification cost cannot be also included in
the cost to date or total cost. It must be charged to the profit of contract immediately in the year it incurred.

Contract Price x stage of completion = revenue recognized
total cost x stage of completion = (cost recognized)
Unexpected expense (if any) (expense)
--------------------
Profit recognized


alternative calculation for profit recognized (just to check )

total contract price
total contract cost
-------------------
profit

profit x stage of completion
= profit - unexpected expense (if any)
= profit recognized

> to find the cost\revenue\profit recognized in the second year or 3rd year, then deduct the total cost\revenue\profit of the previous from the total cost\revenue\profit this year.

Balance sheet


cost to date
profit/loss recognized
(payment received)
receivable


Inventory (if any)

.If there is any error please let me know

[Vandana]

Hi Asif,

This is correct and a good summary! Well done.

Now, can you explain what to do with a loss?

Vandana

[Acid]

Hi

If the loss is realibly measureable and probable then it should be immediately recognised in the income statement..

[saadon2020]

tha k you very much
reallly

[comsdev]

Some construction contracts are completed with in some months. They start in an accounting year and complete in the same year. So no issue arises about the recognition of revenue and expenses of the contract as both of them will be recognized in the same year. But in accounting life we see that many construction contracts take more than one year to complete or they start in one year and complete in the next one. In these circumstances an issue arises about the recognition of revenue and cost of the contracts. This issue has been resolved by IAS 11. Although IAS 11 is not too difficult but it still contains some technical and detailed concepts. Summary of IAS 11 is prepared in a way that it contains all the important and critical concepts of IAS 11 in a concise way. It is very important for students for revision purpose. Check it out by clicking on the following link. I hope you will like it.

Summary of IAS 11 (Construction Contract) - Articles (http://uptodatearticles.com/2010/05/ias-11-construction-contract/)