The principal concern of accounting for long-term construction contracts involves the timing of revenue (and profit) recognition. It has been well accepted that, given the long-
The major challenges in using percentages of completion accounting are to accurately gauge the extent to which the projects are being finished, and to assess the ability of the entity to actually bill and collect for the work done. Since many projects are priced at fixed amounts, or in some other fashion prevent the passing through to the customers the full amount of cost overruns, the computation of periodic profits must be sensitive not merely to the extent to which the project is nearing completion, but also to the terms of the underlying
IAS 11 is the salient international standard addressing the accounting for construction contracts and other situations in which the percentage of completion method of revenue recognition would be appropriate. This standard uses the recognition criteria established by the IASC's Framework as the basis for the guidance it offers on accounting for construction contracts. The various complexities in applying IAS 11, including the estimation of revenues, costs, and progress toward completion, are set forth in the following discussion.
IAS 10, 11, 23, 37
A special provision in a construction contract which either gives the option to the customer to require construction of an additional asset or
The additional asset
The extra contract price fixed for the construction of the additional asset is negotiated without regard to the original contract price.
Billings for work performed or costs incurred by one party that, in accordance with the agreement, should have been performed or incurred by the party billed.
Accumulated billings sent to the purchaser at intervals as various milestones in the project are reached.
Modifications of an original contract that effectively change the provisions of the contract without adding new provisions; synonymous with variations.
Amounts in excess of the agreed-on contract price that a contractor seeks to collect from a customer (or another party) for customer-caused delays, errors in specifications and designs, disputed variations in contract work, or other occurrences that are alleged to be the causes of
Grouping two or more contracts, whether with a single customer or with several customers, into a single profit center for accounting purposes, provided that
The contracts combined are so closely interrelated that, in essence, they could be
The contracts combined are either executed concurrently or in a sequence.
Inventory account used to accumulate the construction costs of the contract project. For the percentage-of-completion method, the CIP account also includes the gross profit earned to date.
Comprised of costs directly
Comprised of initial amount of revenue stipulated by the contract plus any variations in contract work, claims, and incentive payments, provided that these extra amounts of revenue meet the recognition criteria set by the IASC's
(i.e., regarding the probability of future economic benefits
Construction contract in which the contractor is reimbursed for
Percentage-of-completion method used to determine the extent of progress toward completion on a contract. The ratio of costs incurred through the end of the current year divided by the total estimated costs of the project is used to recognize income.
Anticipated additional cost of materials, labor,
Construction contract wherein the contract revenue is fixed either in absolute terms or is fixed in terms of unit rate of output; in certain cases both fixed prices being subject to any cost escalation clauses, if allowed by the contract.
Any additional amounts payable to the contractor if specified performance standards are either met or surpassed.
Method of accounting that recognizes income on a contract as work progresses by matching contract revenue with contract costs incurred, based on the proportion of work completed. However, any expected loss, which is the excess of total incurred and expected contract costs over the total contract revenue, is recognized immediately, irrespective of the stage of completion of the contract.
Costs that are related directly to a contract and are incurred in securing a contract (e.g., architectural designs, purchase of special equipment, engineering fees, and start-up costs). They are included as part of contract costs if they can be identified separately and measured reliably and it is probable that the contract will be obtained.
Unit for the accumulation of
Dividing a single contract, which covers the construction of a number of assets, into two or more profit centers for accounting purposes, provided that
Separate proposals were submitted for each of the assets that are the subject matter of the single contract
The construction of each asset was the subject of separate negotiation wherein both the contractor and the customer were in a position to either accept or reject part of the contract pertaining to a single asset (out of
The costs and revenues pertaining to each individual asset can be separately identified
Proportion of the contract work completed, which may be determined using one of several
Surveys of work performed
Physical proportion of contract work completed
Second-level contractor who enters into a contract with a prime contractor to perform a specific part or phase of a construction project.
Point at which the major work on a contract is completed and only insignificant costs and potential risks
Instruction by the customer for a change in the scope of the work envisioned by the construction contract.