BK108

IAS 11
Construction contracts
KPMG International Financial Reporting Group
AUDIT
2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS
11 - 1
IAS 11-Construction Contracts

Presented by: Rabih Shalabi
July 21, 2005
Why IAS 11-Construction Contracts
The period of execution of most construction contracts

extends to more than one accounting period,
therefore the primary issue in accounting for
construction contracts is the allocation of contract
revenue and contract cost to the accounting period in
which the construction work is performed.

IAS
11 - 3
Definitions
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.

IAS
11 - 4
Construction Contracts
Classification
Fixed Price Contracts

Contractor and customer
agreed to
Cost plus Contracts

Contractor is reimbursed for
a fixed price or
a fixed rate per unit of
output

allowable or otherwise
defined costs plus
a percentage of these
costs or a fixed fees
IAS
11 - 5
Segmenting Construction Contracts

When a contract covers a number of assets, the
construction of each asset should be treated as a
separate construction contract when:
Separate proposals have been submitted for each
asset;
Each asset has been subject to separate negotiation
with the possibility of separate rejection; and
Costs and revenues of each asset can be identified

IAS
11 - 6
Combining Construction Contracts

A group of contracts should be treated as a single
construction contract when:
The group of contracts is negotiated as a single
package;
The contracts are so closely interrelated that they are,
in effect, part of a single project with an overall profit
margin; and
The contracts are performed concurrently or in a
continuous sequence

IAS
11 - 7
Additional asset customer option

A contract to construct an additional asset at the
option of the customer should be separated when:
The additional asset differs significantly in design,
technology or function from the asset(s) covered by
the original contract; or
The price of the additional asset is negotiated without
regard to the original contract price

IAS
11 - 8
Contract Revenue
Contract revenue comprises:
The initial amount of revenue agreed in the contract
Variations: Instruction for a change in the scope of the
work
Claims: Amount that the contractor seeks to collect
from the customer
Incentive Payment: Additional amounts paid to the
contractor if specified performance standards are met
Contract revenue is measured at the fair value of the
consideration received or receivable

IAS
11 - 9
Contract Costs
Contract costs comprise:
Costs that relate directly to the specific contract or that
are attributable to contract activity in general
Such costs that are chargeable to the customer under
the terms of the contract
Cost incurred to secure the contract are attributed to
contract costs

IAS
11 10
Costs Excluded from Contract Costs

The following costs cannot be attributed to contract
costs and are excluded:
General administration cost for which reimbursement
is not specified in the contract
Selling costs
R&D costs for which reimbursement is not specified in
the contract
Depreciation of idle plant and equipment that is not
used on a particular contract

IAS
11 11
Reliable Measurement of Revenue and Costs

When the outcome of a construction contract can be
estimated reliably, the contract revenues and contract
costs are recognised by reference to the stage of
completion
An expected loss should be recognised as an expense
immediately

IAS
11 12
Reliable Measurement of Revenue and Costs

Fixed price contract:
total contract revenue
measurable reliably
probable that economic
benefits will flow to the
entity
contract costs and stage of
completion measurable
reliably
contract costs clearly
identifiable/measurable:
actual vs. estimates
Cost plus contract:

probable that economic
benefits will flow to the
entity
contract costs (whether or
not specifically
reimbursable) clearly
identifiable/measurable

IAS
11 13
No Reliable Measurement of Revenue and

Costs
When the outcome of a construction contract cannot be
estimated reliably:
revenue should be recognised only to the extent of
contract costs incurred that it is probable will be
recoverable
contract costs should be recognised as an expense in
the period in which they are incurred
An expected loss should be recognised as an expense
immediately

IAS
11 14
Stage of Completion (1)

The stage of completion can be determined in a variety of
ways. Depending on the nature of the contract, the
methods may include:
the proportion that contract costs incurred for work
performed to date bear to the estimated total contract
costs
surveys of work performed
completion of a physical proportion of the contract
work

IAS
11 15
Stage of Completion (2)

In most cases the stage of completion is determined by
reference to the costs already incurred compared to the
total costs
Revenue of the period:
Costs incurred
* Total revenues PRR
Total costs
(PRR=Previously Recognised Revenue)

IAS
11 16
Recognition of Contract Revenue and

Expenses Example (1)
ABC enters into a contract to build a road for $ 90 million.
ABCs initial estimate of contract costs is $ 74 million. The
contract starts early in 20x2
If, at the end of 20x2, ABC can estimate reliably the
outcome of the contract, it recognises revenue and
expenses by reference to the stage of completion of the
contract activity. Therefore, if the contract is half
completed, ABC recognises revenue of $ 45 million and
expenses of $ 37 million. The assessment that half the
contract is completed would normally be made by one
half the costs being incurred, that is $ 37 million

IAS
11 17
Example 1
Year1
Year2
Contract Amount 90
Cost incurred to date
Total estimated cost
% of completion 50%
Revenue recognized
Cost recognized
Gross profit 8
8
90
37
74
74
74
100%
45
(37)
45

(90- 45)
(37) (74- 37)
IAS
11 18
Recognition of Contract Revenue and

Expenses.
On the other hand, if at the end of 20x2, ABC is unable to
estimate reliably the outcome of the contract but has
incurred costs of $ 30 million which it is probable will be
recovered, ABC recognises revenue of $30 million and
expenses of $30 million

IAS
11 19
Recognition of contract revenue and expenses

Subsequent change in estimates-Example 2
Assume that ABC has been able reliably to estimate its costs and
expenses for 20X2 and has recorded revenue of $45 million and
expenses of $37 million by reference to stage of completion (costs
incurred method)
In 20X3 ABCs total costs incurred are $74 million. The estimated total
contract costs to build the road are now $80 million, therefore the
contract will be finished during 20X4
Using a consistent stage of completion method, A will record revenue of
(74/80 * 90) 45 = $38.25 million
A will record profit in 20X3 of $1.25 million (revenue $38.25 million,
costs $37 million) compared with a profit of $8 million in 20X2. The IAS
increase in total contract costs is not attributed to 20X2, but recognised
11 2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,
20
in 20X3 (cumulative
catch up)
Example 2
Y1
Contract amount
Y2
90
90
Cost incurred
Total est. cost
% of completion
37
74
50%
74
80
92.5%
80
80
100%
Rev. recognized
Cost recognized
Gross profit
45
(37)
8
38.25
(37)
1.25
6.75
(6)
0.75

Y3
90
IAS
11 21
Expected Losses Example (3)

ABC enters into a contract to build a road for $ 90 million.
ABCs initial estimate of contract costs is $ 74 million. The
contract starts early in 20x2 and will be finished at the
end of 20x3
Before the contract starts, expected costs increase to $
95 million, with no increase in contract revenue. ABC has
to recognise the expected loss of $ 5 million immediately
Cost incurred during 20x2 is 37

IAS
11 22
Example 3
Y1 Y2
Contract amount 90
Cost incurred
37
Total est. cost
95
loss=5
90
95
95
% of completion 39%
100%
Rev. recognized 35
55
Cost recognized
(40)
(55)
Gross profit/(loss) (5)
IAS
11 23
Presentation (1)
An entity presents the gross amount due from customers
as an asset which is the net amount of:
costs incurred plus recognised profits; less
the sum of recognised losses and progress billings
for all contracts in progress for which costs incurred plus
recognised profits (losses) exceed progress billings

IAS
11 24
Presentation (2)
An entity presents the gross amount due to customers as
a liability which is the net amount of:
costs incurred plus recognised profits; less
the sum of recognised losses and progress billings,
for all contracts in progress for which progress billings
exceed costs incurred plus recognised profits (losses)

IAS
11 25
Disclosure (1)
Amount of contract revenue recognised as revenue in the
period
Methods used to determine the contract revenue
recognised in the period
Methods used to determine the stage of completion of
contracts in progress

IAS
11 26
Disclosure (2)
For contracts in progress:
Aggregate amount of cost incurred and recognised
profits (less recognised losses) to date
Amount of advances received
Amount of retentions

IAS
11 27
Contact details
KPMG IFRG Limited
+44 (0)20 7694 8871
www.kpmgifrg.com
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or
entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as
of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate
professional advice after a thorough examination of the particular situation.
2005 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative.
All rights reserved.

BK108

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

BK108

Uploaded by

Copyright:

Available Formats

IAS 11

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

IAS 11-Construction Contracts

Why IAS 11-Construction Contracts

The period of execution of most construction contracts

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Fixed Price Contracts

Cost plus Contracts

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Segmenting Construction Contracts

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Combining Construction Contracts

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Additional asset customer option

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Costs Excluded from Contract Costs

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Reliable Measurement of Revenue and Costs

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Reliable Measurement of Revenue and Costs

Cost plus contract:

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

No Reliable Measurement of Revenue and

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Stage of Completion (1)

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Stage of Completion (2)

* Total revenues PRR

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Recognition of Contract Revenue and

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Recognition of Contract Revenue and

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Recognition of contract revenue and expenses

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

Expected Losses Example (3)

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

You might also like