Section 6200: Construction Contracts
International Accounting Standard 11
Construction Contracts
1. First version of IAS 11
"Accounting for construction contracts" issued in March 1979
2. Revisions
December 1993, Construction contracts
Revenue related IFRSs
IAS 18: Revenue
IAS 20: Accounting for government grants and disclosure of government assistance
IFRS 8: Operating segments
[U.S. GAAP Codification Topic]
605-30 Rights to use
605-35 Construction-type and production-type contracts
910 Contractors - construction
912 Contractors - federal government
3. Fixed price contract
Contractor is paid a fixed contract price or a fixed rate per unit of output
4. Cost plus contract
Contractor is reimbursed for defined costs plus a percentage of costs as fee or a fixed fee
5. Contract revenue = (1) + (2)
(1) initial revenue agreed in the contract
(2) variations in (a) contract work, (b) claims, (c) incentive payments
6. Measurement of contract revenue
at the fair value of the consideration received or receivable
7. Contract costs = (1) + (2) + (3)
(1) costs directly related to the contract
(2) costs that can be allocated to the contract
(3) costs that can be charged to the customer, under the contract
8. Recognition of Revenue and Costs
IAS 11 does not allow completed contract method
Two methods under U.S. GAAP, ASC 605-35-05-5, ARB 45
(1) percentage of completion method
(2) completed contract method
9. Percentage of completion method
By reference to the stage of completion, IAS 11.22
If the contract outcome can be reliably estimated
contract revenue and costs are recognised by reference
to the stage of completion of the contract
10. If contract outcome cannot be reliably estimated, IAS 11.32
--> recognise revenue up to the costs recoverable
--> cost recovery method
--> zero profit margin
11. If contract outcome cannot be reliably estimated
--> U.S. GAAP ASC 605-35-25-90, ARB 45.15
--> completed contract method is preferable
If there is an assurance of no contract loss, ASC 605-35-25-67
--> percentage of completion method, on a zero profit margin, is recommended
12. Zero profit margin, ASC 605-35-25-68
--> revenue and costs are recognized with same amounts
13. Completed contract method
--> no revenue and costs are recognized, until the contract is completed
14. Expected Contract Loss, IAS 11.22
If it is probable that (1) > (2).
(1) total contract costs
(2) total contract revenue
--> recognise expected loss as an expense, immediately
U.S. GAAP, ASC 605-35-25-46
If a loss is expected for the total contract,
--> a provision for the "entire contract loss" is made when they become evident
--> under both methods
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