by The Standard shall be applied in accounting for construction contracts in the financial statements of contractors. A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.
The requirements of this Standard are usually applied separately to each construction contract. However, in certain circumstances, it is necessary to apply the Standard to the
separately identifiable components of a single contract or to a group of contracts together in order to reflect the substance of a contract or a group of contracts.
Contract revenue shall comprise:
(a) The initial amount of revenue agreed in the contract.
(b) variations in contract work, claims and incentive
Payments:
(i) To the extent that it is probable that they will result in revenue.
(ii) They are capable of being reliably measured. Contract revenue is measured at the fair value of the consideration received or receivable.
Contract costs shall comprise:
(a) Costs that relate directly to the specific contract
(b) Costs that are attributable to contract activity in general and can be allocated to the contract
(c) Such other costs as are specifically chargeable to the customer under the terms of the contract.
The Indian Accounting Standard 11 prescribes the accounting treatment of the revenues and costs associated with construction contracts. One of the primary assumptions of accounting is the matching concept. Under this concept, the revenues are matched with the costs in the period in which they are incurred. However, construction contracts are long-term in nature and hence, the revenue and costs are carried over from one accounting period to another. Hence, the need for this standard arose. This standard clearly explains the recognition of contract revenue and its expenses.
The standard defines the following:
Contract Revenue: Contract revenue comprises the initial amount of revenue agreed in the contract; and variations in contract work, claims, and incentive payments, to the extent that they may result in revenue. These need to be capable of being reliably measured.
Construction contract: A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology, and function or their ultimate purpose or use. It also includes agreements of real estate development to provide services together with construction material in order to perform the contractual obligation to deliver the real estate to the buyer. Construction of a specific asset as stated in the definition can be the building of a bridge, dam, pipeline, and much more. Construction of closely interrelated assets can be the construction of refineries.
Contract costs Contract costs shall consist of:
- Costs that are attributable to contract activity in general and can be allocated to the contract.
- Costs that relate directly to the specific contract.
- Such other costs as are specifically chargeable to the customer under the terms of the contract.
The outcome of a fixed price contract can be estimated reliably when:
- It is probable that the economic benefits associated with the contract will flow to the entity.
- Total contract revenue can be measured reliably.
- The contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates.
- The contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably.
Once the outcome of the contract can be estimated reliably the contract costs and revenue will be recognised as revenue and expenses by reference to the stage of completion of the contracting activity at the end of the reporting period. This method is called the percentage of completion method. The stage of completion can be determined by either of the following:
- By the completion of a physical proportion of the contract work.
- The proportion of the contract costs incurred till date to the estimated total contract costs Surveys.
When the outcome of a construction contract cannot be estimated reliably:
- Contract costs shall be recognised as an expense in the period in which they are incurred.
- Revenue shall be recognised only to the extent of contract costs incurred, which are probable and recoverable.
Recognition of expected losses
When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognised as an expense immediately.
An entity shall disclose the amount recognised as contract revenue in the period, the method used to determine the contract revenue recognised and stage of completion of contracts in progress.
For the contracts in progress at the end of the period, an entity shall disclose the aggregate costs incurred and recognised profits to date, the amounts of retentions and advances received.
Appendix A of Ind AS 11 gives guidance on accounting by operators for public-to-private service concession arrangements. It sets out principles for recognition and measurement of the obligations and related rights in service concession arrangements. The Appendix prescribes that an operator shall not recognise the public service infrastructure (within the scope of this appendix) as its Property, Plant and Equipment because the contractual service arrangement does not convey the right to control the use of the infrastructure. It only gives operator the access to operate the infrastructure to provide public service on behalf of the grantor.
Recognition of contract revenue and expenses
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.
When the outcome of a construction contract cannot be estimated reliably:
(a) Revenue shall be recognised only to the extent of contract costs incurred that it is probable will be recoverable.
(b) Contract costs shall be recognised as an expense in the period in which they are incurred.
