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The Canadian Institute of Chartered Accountants (CICA) published a report in June 1980 on ‘Corporate Reporting: Its Future Evolution’ which was written by Edward Stamp.

Important objectives of company financial reporting:

• It is an objective of good financial reporting to provide such information in such a form as to minimise uncertainty about the validity of information, and to enable the user to make his own assessment of the risks associated with the enterprise.
• One of the primary objectives of published corporate financial reports is to provide an accounting by management to both equity and debt investors, not only a management’s exercise of its stewardship function but also of its success (or otherwise) in achieving the goal of producing a satisfactory economic performance by the enterprise and maintaining it in a strong and healthy financial position.
• The objectives of financial reporting should be taken to be directed towards the need of users who are capable of comprehending a complete (and necessarily sophisticated) set of financial statements or alternatively, to the needs of experts who will be called on by the unsophisticated users to advise them.
• It is necessary that the standards governing financial reporting should have ample scope for innovation and evolution as improvements become feasible.

The Stamp Report has not found FASB’s Conceptual Framework and objectives on financial reporting suitable and useful for Canada because of the environmental difference between USA and Canada. This is true not only in case of any particular country but applicable equally to other countries as well.

Financial reporting  its objectives and scope  are influenced by the economic, legal, political, institutional and social factors prevailing in a country. Therefore, these factors need to be considered before developing financial reporting objectives in any country.

Users in Financial Reporting:

The company financial reporting is intended to provide external users information that is useful in making business and economic decisions, that is, for making reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities. Thus, users are potentially interested in the information provided by financial reporting.

Among the potential users are owners, lenders, suppliers, potential investors and creditors, employees, management, directors, customers, financial analysts and advisors, brokers, stock exchanges, lawyers, economists, taxing authorities, regulatory authorities, legislators, financial press and reporting agencies, labour unions, trade associations, business researchers, teachers and students, and the public.

Some users such as owners, creditors, and employees have or contemplate having direct economic interests in particular business enterprises. Managers and directors, who are charged with managing the enterprise in the interest of owners, also have a direct interest.

Some users  such as financial analysts and advisors, regulatory authorities, and labour unions have indirect interests because they advise or represent those who have or contemplate have direct interests.

Potential users of financial information most directly concerned with a particular business enterprise are generally interested in its ability to generate favourable cash flows because their decisions relate to amounts, timing, and uncertainties of expected cash flows.

To investors, lenders, suppliers, and employees, a business enterprise is a source of cash in the form of dividends or interest and, perhaps, appreciated market price, repayment of borrowing, payment of goods or services, or salaries or wages.

They invest cash, goods, or service in an enterprise and expect to obtain sufficient cash in return to make the investment worthwhile. To customers, a business enterprise is a source of goods or services, but only by obtaining sufficient cash, to pay for the resources it uses and to meet its other obligations, can the enterprise provide those goods or services.

To managers, the cash flows of a business enterprise are a significant part of their management responsibilities, including their accountability to directors and owners. Many, if not most, of their decisions have cash flow consequences for the enterprise.

Thus, investors, creditors, employees, customers, and managers significantly share a common interest in an enterprise’s ability to generate favourable cash flows. Other potential users of financial information share the same interest, derived from investors; creditors, employees, customers, or managers whom they advise or represent or derived from an interest in how those groups (and especially shareholders) are fair.

Some of the potential users listed above may have specialised needs but also have the power to obtain the information needed. For example, the information needed to enforce tax laws and regulations are specialised needs.

However, although the taxing authorities often use the information in financial statements for their purposes, they also have statutory authority to require the specific information they need to fulfill their functions, and do not need to rely on information provided to other groups.

Some investors and creditors or potential investors and creditors may also be able to require a business enterprise to provide specified information to meet a particular need. For example, a bank or insurance company negotiating with an enterprise for a large loan or purchase of securities can often obtain desired information by making the information a condition for completing the loan transaction.

Some users of financial information can obtain more information about an enterprise than others. This is clearly so for managers, but it also holds true for others, such as large scale equity shareholders and creditors. Financial statements are, it is argued, especially important to those who have limited access to information and limited ability to interpret it.

Financial Reporting involves the disclosure of financial information to the various stakeholders about the financial performance and financial position of the organization over a specified period of time. These stakeholders include; investors, creditors, public, debt providers, governments & government agencies.

The Objectives & Purposes of financial reporting:

• Providing information to investors, promoters, debt provider and creditors which is used to enable them to male rational and prudent decisions regarding investment, credit etc.
• Providing information to the management of an organization which is used for the purpose of planning, analysis, benchmarking and decision making.
• Providing information to shareholders & public at large in case of listed companies about various aspects of an organization.
• Providing information as to how an organization is procuring & using various resources.
• Providing information about the economic resources of an organization, claims to those resources (liabilities & owner’s equity) and how these resources and claims have undergone change over a period of time.
• Providing information to various stakeholders regarding performance management of an organization as to how diligently & ethically they are discharging their fiduciary duties & responsibilities.
• Enhancing social welfare by looking into the interest of employees, trade union & Government.
• Providing information to the statutory auditors which in turn facilitates audit.

Primary objectives of financial reporting:

(a) Investment Decision-making.

(b) Management Accountability.

(a) Investment Decision-Making:

The basic objective of financial reporting is to provide information useful to investors, creditors and other users in making sound investment decisions. These decisions concern the efficient allocation of investment funds and the selection among investment opportunities.

(b) Management Accountability:

A second basic objective of financial reporting is to provide information on management accountability to judge management’s effectiveness in utilizing the resources and running the enterprise.

Management of an enterprise is periodically accountable to the owners not only for the custody and sale-keeping of enterprise resources, but also for their efficient and profitable use and for protecting them to the extent possible from unfavorable economic impacts of factors in the economy such as technological changes, inflation or deflations.

Enable the Analysis of the Assets, the Liabilities, and the Owner’s Equity

By monitoring the assets, the liabilities and the owner’s equity, and any changes in them using the financial reporting by the company, one can know that what it can expect in the future and should be changed now for the future. It also shows the availability of resources by the company for future growth.

Track the Cash Flow in the Business

With the help of financial reporting, different stakeholders of the company can know that from where the cash in the business is coming, where the money is going, whether there is sufficient liquidity in the business or not to meet its obligations, whether the company can cover their debts, etc.

It shows the details about the cash transactions by adjusting the non-cash transactions, thereby determining whether cash in the business is enough all the time or not.

Information About the Accounting Policies Used

There are different types of accounting policies, and various companies can use different policies as per their particular requirements and applicability. Financial reporting provides information about the accounting policies used by the company. This information helps the investors and the other stakeholders in knowing about the policies used in the company for the different aspects.

It also helps to know whether the proper comparison between the two companies is possible or not. Two companies within the same industry can also use two different policies, so the person making the comparison should consider this fact in mind at the time of making the comparison.

Provide Information to the Investors and the Potential Investors

Investors of the company who have invested their funds in any business want to know that how much return they are getting from their investment, how efficiently their capital investment is being used, and how the company is reinvesting the cash.

Also, the potential investors want to know how the company is performing in the past where they are planning to invest their funds and whether it is worth investing.

Financial reporting by the company helps the investors and the potential investors in deciding whether the business is worth for their cash or not.

The True-blood Committee stated that “The basic objective of financial statements is to provide information useful for making economic decisions.” Recently, the FASB (USA) in its Concept No. 1 also concluded that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions.

It is essential to have an understanding of the investment decision process applied by external users in order to provide useful information to them. The investors seek such investment which will provide the greatest total return with an acceptable range of risk. Investment return is comprised of future interest or dividends and capital appreciation (or loss).

To develop objectives of financial statements, a Study Group was appointed in 1971 by American Institute of Certified Public Accountants under the Chairmanship of Robert M. Trueblood. The Study Group solicited the views of more than 5000 corporations, professional firms, unions, public interest groups, national and international accounting organisations and financial publications.

The Study Group conducted more than 50 interviews with executives from all sectors of the business and from government. To elicit the widest possible range of views, 35 meetings were held with institutional and professional groups representing major segments of the US economy.

The objectives developed in the Study Group Report are as follows:

• An objective of financial statements is to serve, primarily, those users who have limited authority, ability, or resources to obtain information and who rely on financial statements as their principal source of information about an enterprise’s economic activities.
• The basic objective of financial statements is to provide information useful for making economic decisions.
• An objective of financial statements is to provide information useful to investors and creditors for predicting, comparing and evaluating potential cash flows to them in terms of amount, timing and related uncertainty.
• An objective of financial statements is to supply information useful in judging management’s ability to utilise enterprise resources effectively in achieving the primary enterprise goal.
• An objective of financial statements is to provide users with information for predicting, comparing, and evaluating enterprise earning power.
• An objective of financial statements is to provide factual and interpretative information about transactions and other events which is useful for predicting, comparing and evaluating enterprise earning power. Basic underlying assumptions with respect to matters subject to interpretation, evaluation, prediction, or estimation should be disclosed.
• An objective is to provide a statement of periodic earnings useful for predicting, comparing and evaluating enterprise earning power. The net result of completed earning cycles and enterprise activities resulting in recognisable progress towards completion of incomplete cycles should be reported. Changes in values reflected in successive statements of financial position should also be reported, but separately, since they differ in terms of their certainty realisation.
• An objective is to provide a statement of financial position useful for predicting, comparing and evaluating enterprise earning power. This statement should provide information concerning enterprise transactions and other events that are part of incomplete earning cycles. Current values should also be reported when they differ significantly from historical costs. Assets and liabilities should be grouped or segregated by the relative uncertainty of the amount and timing of prospective realisation of liquidation.
• An objective is to provide a statement of financial activities useful for predicting, comparing, and evaluating enterprise earning power. This statement should report mainly on factual aspects of enterprise transactions having or expected to have significant cash consequences. This statement should report data that require minimal judgement and interpretation by the compiler.
• An objective of financial statements for governmental and non-profit organizations is to provide information useful for evaluating the effectiveness of management of resources in achieving the organisation’s goals. Performance measures should be qualified in terms of identified goals.
• An objective of financial statements is to report on those activities of the enterprise affecting society which can be determined and described or measured and which are important to the role of the enterprise in its social environment.
• An objective of financial statements is to provide information useful for the predictive process. Financial forecasts should be provided when they will enhance the reliability of users’ predictions.

The Accounting Standards Steering Committee of the Institute of Chartered Accountants in England and Wales Published ‘The Corporate Report’ in 1976 as a discussion paper covering the scope and aims of published financial reports, public accountability of economic entities, working concepts as a basis for financial reporting, and most suitable means of measuring and reporting the economic position, performance and prospects of undertakings.

The Corporate Report’s main findings are as follows:

1. The basic philosophy and starting point of The Corporate Report is that financial statements should be appropriate to their expected use by potential users. In others words, they should attempt to satisfy the information needs of their users.
2. The report assigned responsibility for reporting to the ‘economic entity’ having an impact on society through its activities. The economic entities are itemized as limited companies, listed and unlisted; pension schemes, charitable and other trusts, and not-for-profit organisation; non-commercially oriented Central Government departments and agencies, partnerships and other forms of un-incorporate business enterprises; trade unions and trade and professional association; local authorities, and nationalized industries and other commercially oriented public sector bodies.
3. The report defined users as those having a reasonable right to information and whose information needs should be recognised by corporate reports. The users are identified as the equity investor group, the loan creditor group, the employee group, the analyst-adviser group, the business contact group, the government, and the public.
4. To satisfy the fundamental objectives of annual reports set by the basic philosophy, seven desirable characteristics are cited, namely, that the corporate report be relevant, understandable, reliable, complete, objective, timely, and comparable.
5. After documenting the limitations of current reporting practices, the report suggests the need for the following additional statements:

• An employment report, showing the-size and composition of the work force relying on the enterprise for its livelihood, the work contribution of employees, and the benefits earned.
• A statement of value added, showing how the benefits of the efforts of an enterprise are shared among employees, providers of capital, the state and reinvestment.
• A statement of money exchange with government, showing the financial relationship between the enterprise and the state.
• A statement of future prospects, showing likely future profit, employment, and investment levels.
• A statement of corporate objectives showing management policy and medium-term strategic targets.
• A statement of transactions in foreign currency, showing the direct cash dealing, between the United Kingdom and other countries.

Finally, after assessing six measurement bases (historical cost, purchasing power, replacement cost, net realisation value, value to the firm, and net present value) against three criteria (theoretical acceptability, utility, and practicality) the report rejected the use of historical cost in favour of current values accompanied by ;he use of general index adjustment.

Fundamental Characteristics distinguish useful financial reporting information from that is not useful or misleading.

The two fundamental Qualitative characteristics are:

• Relevance
• Faithful Representation

Materiality: Information is material if omitting it, or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.

Materiality is an aspect of relevance which is entity-specific. It means that what is material to one entity may not be material to another. It is relative. Information is material if it is significant enough to influence the decision of users. Materiality is affected by the nature and magnitude (or size) of the item.

Faithful Representation

The Financial reports represent economic phenomena in words and numbers. The financial information in the financial reports should represent what it purports to represent. Meaning, it should show what really are present (Example: Position of Assets and Liabilities) and what really happened (Example: Position of Income and expenditure), as the case may be. 

Timeliness:

All the information in the financial statements must be provided within a relevant span of time. The disclosures must not be excessively late or delayed so that while making their economic decisions the users of these statements possess all the relevant and up-to-date knowledge. Although this characteristic may take more resources but still it is a vital characteristic as delayed information makes any corrective reactions irrelevant.

Reliability:

The information provided in the financial statements must be reliable and true. The information extracted to prepare these financial statements must be from reliable and trustworthy sources. The financial statements must depict the true and fair picture of the status of the company affairs. This means that the information provided must not have any significant errors or material misstatements. The transactions shown must be based on the concepts of prudence and must represent the true nature of company’s transactions and operations. The areas that are judgmental and subjective in nature must be presented with due care and keen competence.

Comparability:

The financial statements must be prepared in such a way that they are comparable with prior year financial statements. This characteristic of financial statements is very important to maintain, as it makes sure that the performance of the company could be monitored and compared. This characteristic is maintained by adopting accounting policies and standards that are applied are consistent from period to period and between different jurisdictions. This enables the users of the financial statements to identify and plot trends and patterns in the data provided, which makes their decision making easier.

Understandability:

The financial statements are published to address the shareholders of the company. So, it is important that these statements must be prepared in such a way that is easy to understand and interpret for the shareholders. The information provided in these statements must be clear and legible. For the sake of understandability, the management must consider not only the statutory data and information but also the voluntary information disclosures which would make financial statements easier to understand. The directors must elaborate the information provided in the statements where necessary.

Ind AS 103 “Business Combinations” deals with the accounting for business combinations in standalone as well as consolidated financial statements. A set of assets acquired and liabilities assumed are typically regarded as a business if they can together run independently as a going concern (i.e. it consists of inputs and processes applied to those inputs, which has the ability to create an output). If they do not constitute business, the same shall be accounted as an asset acquisition.

It is a transaction or event where an acquirer obtains control of one or more business. ‘A business combination may be structured in a variety of ways for legal, taxation or other reasons, which include but are not limited to:

(a) One or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged into the acquirer.

(b) One combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners.

(c) All of the combining entities transfer their net assets, or the owners of those entities transfer their equity interests, to a newly formed entity (sometimes referred to as a roll-up or put-together transaction).

(d) A group of former owners of one of the combining entities obtains control of the combined entity’(Appendix B B6)

One of the most essential elements covered in this Standard is the manner of accounting in a common control transaction. Before we discuss the accounting procedure, it is crucial to understand the meaning of terms “control” and “common control”.

Ind AS 103 has defined common control business combination as a business combination in which all the combining entities or business are ultimately controlled by the same person/ persons both before and after the combination and such control is not transitory in nature. It further states that a company may be said to be under the control of another entity or an individual or a group of them where they exercise the right to govern its financial statements and operating policies arising out of contractual agreements so as to obtain benefits from its activities.

Interestingly, Ind AS 103 does not prescribe any threshold limit from a shareholding perspective to determine control in the entity. Instead, it has laid down few aspects such as decision-making powers, board composition and contractual rights to determine control. Therefore, this brings in an element of subjectivity in determining where control lies.

Ind AS 110 Consolidated Financial Statements states that where an entity (say, “A”) has power over the other entity (say, “B”), has the rights to variable returns from its involvement with B and the ability to use its power to affect the returns of B, then it may be said that Entity A controls Entity B.

Accounting treatment under common control transactions under Ind AS 103

Ind AS 103 prescribes application of pooling of interest method to account for common control business combinations. Under this method:

• All identified assets and liabilities will be accounted at their carrying amounts, i.e. no adjustment would be made to reflect their fair values unlike in case of non-common control business combinations.
• Balance of retained earnings in the books of acquiree entity shall be merged with that of the acquirer entity, and identity of the reserves shall be preserved.
• Any difference, whether positive or negative, shall be adjusted against the capital reserves (or “Amalgamation Adjustment Deficit Account” in some cases).
• Hence, no goodwill can be recorded in books under common control transactions under Ind AS 103.

Applying the acquisition method comprises four steps that are:

• Determining the acquisition date.
• Identifying the acquirer.
• Recognising and measuring identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquire.
• Recognising and measuring excess or shortfall paid as relative to fair value of assets.
• Recognise and measure the consideration transferred for the acquire.

Initial Accounting of BC:

If initial accounting of BC could be done only on provisional measurement at the end of the reporting period, adjustments to provisional measurement based on new information as to facts and circumstances that existed at the acquisition date are allowed within one year of the acquisition date retrospectively as if the adjustments have been made at the acquisition date except to correct error under Ind.AS 8.

BC achieved in stages:

If the acquirer enhances the equity interest in the acquiree to achieve control, the previous previously held is re-measured at acquisition date fair value any resultant gain or loss is recognised in Profit and loss.

Date of acquisition is the date on which acquirer obtains control of the acquired entity

Acquisition related costs are accounted as expenses in the period they are incurred and related services received such as follows:

• Cost of internal staff who work on the deal.
• Cost of maintaining an acquisitions department.
• Cost of investigation.
• Issue costs for debt or equity.
• Incentives to of potential targets employees to remain with company post acquisition.
• Direct costs related to acquisition like consultant fees, rating fee etc.

Ind AS 111, “Joint Arrangements,” establishes principles for the financial reporting by entities that have an interest in arrangements that are controlled jointly (i.e., joint control) with one or more other entities. It identifies two types of joint arrangements: joint ventures and joint operations. The classification depends on the parties’ rights and obligations arising from the arrangement. In a joint operation, parties have rights to the assets and obligations for the liabilities relating to the arrangement and recognize their share of assets, liabilities, revenues, and expenses. In a joint venture, parties have rights to the net assets of the arrangement and account for their interest using the equity method in accordance with Ind AS 28, “Investments in Associates and Joint Ventures.”

Ind AS 111 requires entities to assess the structure, legal form, contractual terms, and other facts and circumstances of the arrangement to classify it accurately. This Standard emphasizes substance over form, requiring detailed judgment to determine the type of joint arrangement and the appropriate accounting treatment. The aim is to provide financial statement users with relevant information about an entity’s involvement in joint arrangements, including the nature, risks, and financial effects.

Joint Arrangements (Ind AS 111) Scope:

Ind AS 111, “Joint Arrangements,” applies to entities that are parties to joint arrangements. The scope of this standard is to provide financial reporting guidance for entities that engage in joint arrangements with other parties, focusing on the rights and obligations that arise from such arrangements. Joint arrangements are defined based on the contractual arrangement and the existence of joint control.

Scope Inclusions:

1. Joint Operations:

Entities participating in a joint operation recognize their direct rights to the assets, and obligations for the liabilities, associated with the arrangement. They account for their share of assets, liabilities, revenues, and expenses in accordance with the terms of the joint arrangement.

2. Joint Ventures:

Entities participating in joint ventures recognize their investment using the equity method according to Ind AS 28, “Investments in Associates and Joint Ventures.” A joint venture is a joint arrangement whereby the parties have rights to the net assets of the arrangement.

Scope Exclusions:

• Business combinations accounted for under Ind AS 103, “Business Combinations,” are excluded from the scope of Ind AS 111. However, joint arrangements may be relevant in identifying whether control exists in various investment scenarios.
• Ind AS 111 does not apply to the accounting for investments in associates, which are covered by Ind AS 28, nor does it apply to investments in subsidiaries accounted for under Ind AS 110, “Consolidated Financial Statements.”
• Financial instruments, including those that may give rise to joint control, are excluded from the scope of Ind AS 111 and are instead covered by Ind AS 109, “Financial Instruments.”

Joint Arrangements (Ind AS 111) Assessment:

The assessment of whether an arrangement constitutes a joint arrangement under Ind AS 111 involves evaluating whether there is joint control, and if so, determining the type of joint arrangement it is (joint operation or joint venture). This assessment is critical as it affects the accounting treatment in the financial statements of the parties involved.

1. Identifying a Joint Arrangement

A joint arrangement is an arrangement of which two or more parties have joint control. The initial step is to identify if the arrangement is structured through a separate vehicle and if the contractual arrangement gives the parties joint control over the arrangement.

2. Assessing Joint Control

Joint control exists only when decisions about the relevant activities (those that significantly affect the returns of the arrangement) require the unanimous consent of the parties sharing control. The assessment includes considering:

• Contractual Arrangement: Review the contractual agreement to determine if there is a sharing of control. The agreement should specify how strategic financial and operating decisions are made, requiring unanimous consent.
• Existence of Joint Control: There must be evidence that the parties are required to act together to control the arrangement. This involves shared power to govern the financial and operating policies so as to obtain benefits from the activities.

3. Determining the Type of Joint Arrangement

Once joint control is established, the next step is to classify the joint arrangement as either a joint operation or a joint venture based on the rights and obligations of the parties:

• Joint Operations: Parties to the joint operation have rights to the assets, and obligations for the liabilities, relating to the arrangement. Look for evidence that the parties have direct rights and obligations for the assets and liabilities.
• Joint Ventures: Parties have rights to the net assets of the arrangement. This typically involves setting up a separate vehicle (e.g., a company, partnership, or other entity) that is jointly controlled, where the parties do not have direct rights to the assets or direct obligations for the liabilities but have rights to the net assets.

4. Evaluating the Structure, Legal Form, Terms, and Facts and Circumstances

The classification is not solely based on the legal form of the arrangement. Instead, it involves a deeper analysis of:

• The Structure of the Joint Arrangement: Whether the arrangement is structured through a separate vehicle.
• Legal Form of the Separate Vehicle: Legal form and its implications on the rights and obligations of the parties.
• Terms of the Contractual Arrangement: Specific rights and obligations outlined in the agreement regarding the assets and liabilities.
• Facts and Circumstances: Other relevant facts and circumstances that could impact the classification, such as regulatory or financial requirements.

5. Continuous Assessment

The classification of a joint arrangement as a joint operation or a joint venture is not static and should be reassessed if the facts and circumstances underlying the arrangement change.

Types of Joint Arrangements:

1. Joint Operations

In a joint operation, the parties that have joint control of the arrangement (joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement. Each party to the joint operation:

• Recognizes its share of the assets co-controlled, including its share of any assets held jointly.
• Recognizes its share of the liabilities for which it is jointly responsible.
• Recognizes its share of the revenue from the sale of the output by the joint operation, and its share of the expenses incurred by the joint operation.

Joint operations are characterized by the fact that the activities are conducted through the joint arrangement itself, and the parties have direct rights and obligations for the assets and liabilities. The accounting for a joint operation involves recognizing each of these elements in the participants’ own financial statements.

2. Joint Ventures

In a joint venture, the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint ventures are typically structured through a separate legal entity, in which each venturer has an equity interest.

• The joint venture operates autonomously, with a distinct legal and financial structure.
• The parties (joint venturers) recognize their investment in the joint venture and account for it using the equity method as prescribed by Ind AS 28, “Investments in Associates and Joint Ventures.” Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the joint venture.

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.