construct

16
STAGE OF COMPLETION
• Reference to proportion of work done
• Specific points
17
REFERENCE TO WORK DONE
Work certified
Value of work certified Total contract price Costs Cost of work competed to date Total expected costs
18
OTHER CONSIDERATIONS
• Normally do not use progress payments
• Known inequalities • Review estimates
19
INCOME STATEMENT
• Revenue
– Initial amount – Variations, claims and incentive payments
27
• Variations
• Claims • Incentive payments
11
CONTRACT COSTS
• Contract specific costs
• Costs attributable to general contract activity
• Other costs specifically chargeable
Conflict between accounting concepts
• Accruals • Prudence • Realisation
3
JUSTIFICATION OF TREATMENT
• Known buyer and seller
• Need for timely information • True and fair view
26
DISCLOSURE REQUIREMENTS
• Accounting policy • Contract revenue recognised • Balance sheet analysis
– The aggregate amount of costs incurred and recognised profits to date – The amount of advances received – Amount of retentions
Invoiced: DR CR
Trade receivables Progress payments
Cash received DR Cash CR Trade receivables
15
ACCOUNTING TREATMENT
• If outcome cannot be estimated with reasonable certainty then no profit should be recognised.
13
RECORDING CONTRACT COSTS
Record in the ledger by:
DR CR Contract account Cash/creditors
14
INVOICING
• Recorded as progress payments • Retentions may be deducted
– Progress payments < Turnover (unbilled contract revenue) – Costs not taken to cost of sales
• Gross amounts due to customers for contract work:
– Progress payments > Turnover – Losses
• Cost of sales
20
EXAMPLE 1: PROFIT MAKING CONTRACT
The following details relate to a contract. Year two figures are cumulative.
Year 1 Year 2
Total contract price
Cost plus The contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of those costs or a fixed fee.
10
COMPONENTS OF REVENUE
6
CONTRACTS COVERED
• Construction of assets.
• Rendering of services directly related to the construction of assets
• Destruction or restoration of assets, and the restoration of the environment following the demolition of assets.
• When the outcome of a contract can be recognised with reasonable certainty use the percentage completion method.
• Recognise losses immediately
• Account for each contract separately
Total expected costs Work certified Costs to date Amounts invoiced
200,000
150,000 45,000 36,000 10,000
210,000
165,000 98,700 90,000 150,000
21
EXAMPLE 2 - LOSS MAKING CONTRACT
Contract account • Debit balance - Costs of future work • Credit balance - Foreseeable loss
24
BALANCE SHEET
Balance included under either:
• Gross amounts due from customers for contract work:
CONSTRUCTION CONTRACTS
1
OBJECTIVES
• • • • Nature of the problem Definition of a construction contract Accounting treatment Disclosure requirements
2
NATURE OF THE PROBLEM
4
REGULATORY FRAMEWORK
UKGAAP SSAP 9 Stock and long term contracts IGAAP IAS 11
Construction contracts
5
DEFINITION
A contract specifically negotiated for the construction of an asset or combination of assets that are closely interrelated or interdependent in terms of their design, technology, and function for their ultimate purpose or use
25
CALCULATION OF BALANCE SHEET AMOUNT
Contract costs to date
Profit/(loss) recognised Progress payments billed Gross amts due from/to customers
X
X (X) X
8
COMBINATION OF CONTRACTS
Treat a group of contracts as a single contract when:
– Negotiated as a single package
– Contracts closely interrelated – Contracts performed concurrently or in a continuous sequence.
The following details relate to a contract:
£’000 Total contract price 30d costs to complete Amounts invoiced
150
225 116
22
9
CONTRACT REVENUE
Fixed price The contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses.
7
SEGREGATION OF CONTRACTS
A contract covering more than one asset should be treated as separate contracts when:
–
– –
Separate proposals submitted
Each asset subject to separate negotiation The costs and revenues separately identified.