ACCOUNTING STANDARD - 7 ACCOUNTING FOR CONSTRUCTION CONTRACTS J.P., KAPUR & UBERAI

PURPOSE PURPOSE Accounting for construction contracts in the financial statements of enterprises undertaking such contracts. Applies to enterprises undertaking construction activities not as contractors but on their own account as venture of a commercial nature where the enterprise has entered into agreements for sale. J.P., KAPUR & UBERAI

DEFINITION DEFINITION A CONSTRUCTION CONTRACT is a contract for the construction of an asset or of a combination of assets which together constitute a single project J.P., KAPUR & UBERAI

TYPES OF CONTRACTS TYPES OF CONTRACTS 1.Fixed price contracts. 2.Cost plus contracts. J.P., KAPUR & UBERAI

METHODS FOLLOWED PERCENTAGE OF COMPLETION METHOD OR COMPLETED CONTRACT METHOD The method of accounting selected represents an accounting policy and therefore if there is any change in the accounting policy the effect of the change and its amount needs to be disclosed. J.P., KAPUR & UBERAI

PERCENTAGE OF COMPLETION METHOD Revenue is recognised as the contract activity progresses based on the stage of completion. This method can be used only if the outcome of the contract can be reliably estimated. Normally, the profit is not recognised in fixed price contracts unless the work on a contract has progressed to a reasonable extent (20 to 25% of the work) J.P., KAPUR & UBERAI

MEASUREMENT OF COMPLETION MEASUREMENT OF COMPLETION TAKING INTO ACCOUNT ALL RELEVANT FACTORS 1.The proportion that costs incurred to date bear to the estimated total costs of the contract. 2.By the surveys which measure work performed. While recognising the profit under percentage of completion method, an appropriate allowance for future unforeseeable factors should be made on either a specific or a percentage basis. J.P., KAPUR & UBERAI

COMPLETED CONTRACT METHOD Revenue is recognised only when the contract is completed or substantially completed Costs and progress payments received are accumulated during the course of the contract but revenue is not recognised until the contract activity is substantially completed. J.P., KAPUR & UBERAI

DISCLOSURE uThe amount of construction work-in-progress uProgress payments received and advances and retentions on account of contracts included in construction work-in-progress  The amount receivable in respect of income accrued under cost plus contracts not included in construction work-in-progress. J.P., KAPUR & UBERAI