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Thread: Accounting Standard (AS) 07 - Construction Contracts

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    Thumbs up Accounting Standard (AS) 07 - Construction Contracts

    Accounting Standard 7
    Construction Contracts
    Accounting Standard (AS) 7, Construction Contracts (revised 2002), issuedby the Council of the Institute of Chartered Accountants of India, comes intoeffect in respect of all contracts entered into during accountingperiods commencing on or after 1-4-2003 and is mandatory in nature2from that date. Accordingly, Accounting Standard (AS) 7, ‘Accounting forConstruction Contracts’, issued by the Institute in December 1983, is notapplicable in respect of such contracts. Early application of thisStandard is, however, encouraged.The following is the text of the revised Accounting Standard.
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    Last edited by Admin; 25-03-2010 at 05:20 PM.

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    Thumbs up Accounting Standards Interpretation (ASI) 29 - Turnover in case of Contractors

    Accounting Standards Interpretation (ASI)29

    Turnover in case of Contractors
    Accounting Standard (AS) 7,ConstructionContracts
    (revised 2002)
    ISSUE
    1. AS 7, Construction Contracts (revised 2002) deals,
    inter alia, with revenue recognition in respect of construction contracts in the financial statements of contractors. It requires recognition of revenue by reference to the stage of completion of a contract (referred to as ‘percentage of completion method’).Thismethod results in reportingof revenuewhich can be attributed to the proportion of work completed. Under thismethod, contract revenue is recognised as revenue in the statement of profit and loss in the accounting
    period in which the work is performed.
    The issue is whether the revenue so recognised in the financial statements of contractors as per the requirements of AS 7 can be considered as
    ‘turnover.

    CONSENSUS
    2. The amount of contract revenue recognised as revenue in the statement of profit and loss as per the requirements of AS 7 should be considered as
    ‘turnover.

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    Thumbs up Cut-off date for capitalisation of construction cost

    A. Facts of the Case

    1. A company incorporated under section 25 of the Companies Act, 1956, organises fairs/exhibitions in order to achieve its objective of promoting India’s trade. During the year 1998-99, the company entrusted the work of construction of a new hall to CPWD which was completed in all respects in November, 1998, including structural work and electrical installations.
    2. As the hall was ready for commercial use, the company started letting out the same from November, 1998 which generated rental income of Rs. 169.33 lakh and Rs. 419.64 lakh in the years 1998-99 and 1999-2000 respectively.
    3. As the hall was put to commercial use from November, 1998, the expenditure of Rs. 9.97 crore incurred on the construction of the hall was capitalised with effect from November, 1998, to depict true and fair view of the state of affairs of the company. The formal completion certificate of the hall is, however, still awaited from CPWD.
    4. The government auditors are of the view that since the completion certificate of the hall is awaited from CPWD the expenditure incurred on the construction of the hall should be shown as ‘Capital Work-in-Progress’ in the annual accounts of the company after deducting the income generated from the project during construction period. Accordingly, the rental income of Rs. 588.97 lakh from the letting out of the hall upto 31.3.2000 should be deducted from the construction cost of the project.
    5. According to the querist, the audit observation is based on the ‘Guidance Note on Treatment of Expenditure During Construction Period’ issued by the Institute of Chartered Accountants of India. The company’s contention is that the hall was ready for commercial use in November, 1998 and that issuance of completion certificate by CPWD has no relevance to the actual completion of work because such certificates are issued only after rectification of all the defects by the contractors and settlement of final bills by CPWD. As per the querist, the said Guidance Note referred to by the government auditors deals with treatment of income from miscellaneous sources generated during construction period, whereas, in the case of the company, the purpose of the construction of the hall was to generate rental income. Hence, the company took the view that the Guidance Note referred to above does not apply in the instant case.
    6. The government auditors, however, dropped the above observation from their report on the assurance that the matter shall be referred to the Institute of Chartered Accountant of India for expert advise.

    B. Queries

    7. The querist has sought the opinion of the Expert Advisory Committee as to:
    (a) whether the cost of construction of the hall less the rental income received in the intervening period should be capitalised on formal receipt of certificate of completion from CPWD and depreciation charged thereafter, or
    (b) whether depreciation should be charged in the accounts from the date the hall has been put to commercial use in November, 1998.

    C. Points Considered by the Committee

    8. In this context, the Committee also notes that paragraph 20 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, provides that “the cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use”. The Committee also notes that the intention of the construction of the hall was the generation of rental income from letting out of the same. Therefore, the Committee is of the view that the hall should be construed as ready for its intended use when it is ready to generate rental income. Consequently, the cut-off date for capitalisation of expenditure should be the date when the hall is ready for its intended use and any expenditure incurred or income generated after the cut-off date should be treated as of revenue nature.

    D. Opinion

    On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 7:
    (a) The cost of construction of the hall should be capitalised when the hall is ready for its intended use of letting out. The receipt of certificate of completion from CPWD is a matter of procedural formality and, will have no bearing on the capitalisation of the hall in the books of account. Accordingly, the rental income earned by the company after the cut-off date as arrived at as per paragraph 8 above would not be deducted in arriving at the construction cost of the project.
    (b) The depreciation should be charged from the date the hall was put to commercial use, that is from November, 1998.

    Opinion finalised by the Committee on 17.1.2001.

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    Thumbs up Treatment of retention money in the financial statements of a contractee

    company is setting up an integrated iron and steel plant. The entire work for setting up the plant has been divided into several packages which have been awarded to different contractors for execution.
    2. The terms of payment in various contracts are as below:
    (i) For civil contracts
    (a) 10% of total contract price as mobilisation advance shall be paid after signing of the contract, and subject to submission of pre-receipted invoice and bank guarantee.
    (b) 80% of the total value of work executed shall be paid on monthly pro-rata basis subject to satisfactory progress of work and on certification of work by the purchaser (i.e., the company)/its consultants and on submission of certain documents. Total value of works executed shall be arrived based on actual quantity of works executed as certified by the purchaser/consultant and unit rates applicable for such items of work.
    (c) 10% of the contract price shall be paid on issue of completion certificate by the purchaser against submission of pre-receipted invoice and bank guarantee for equal amount valid till the expiry of maintenance and guarantee period.
    (ii) For supply contracts
    (a) 10% of ex-works price towards supplies shall be paid as advance after signing of the contract. Payment shall be released only after submission of a bank guarantee for equal amount valid till sixty days after the completion of supplies and having submitted the bank guarantee towards security deposit.
    (b) 75% of the ex-works price of the supplies and 100% of taxes, duties and freight on pro-rata basis subject to submission of requisite documents as per despatch instructions.
    (c) 5% of the ex-works price after issue of preliminary acceptance certificate.
    (d) 5% of the ex-works price after issue of commissioning certificate and submission of a fresh bank guarantee for 5% of total contract price towards guarantee/warranty valid till the expiry of guarantee/warranty period.
    (e) 5% of the ex-works price after issue of final acceptance certificate.
    (iii) For erection and fabrication contracts
    (a) 5% of the contract price as advance against submission of bank guarantee for equal amount and another bank guarantee towards security deposit for 10% of the total contract price. Both the bank guarantees will be valid till sixty days after issue of commissioning certificate.
    (b) 5% of the contract price after mobilisation of men and material handling equipment as approved by the purchaser/consultant to commence erection work at site and establishment of site office and stores. The payment shall be released on receipt of a bank guarantee for equal value valid till sixty days after issue of commissioning certificate.
    (c) 75% of the contract price on monthly pro-rata basis as per approved billing schedule subject to satisfactory progress of work as per milestones fixed and duly certified by purchaser/consultant on production of requisite documents.
    (d) 5% of the contract price after issue of preliminary acceptance certificate.
    (e) 5% of the contract price on issue of commissioning certificate and submission of a performance bank guarantee for 5% of the total contract price towards guarantee/warranty valid till the expiry of guarantee/warranty period.
    (f) 5% of the contract price upon issue of final acceptance certificate.
    3. The querist has reproduced the company’s accounting policy relating to capital work-in-progress which is as below:
    “In accounting for the capital WIP, the portion that has been retained as per terms of contract is not accounted for till it becomes due for payment/release of amounts after completion of the job.”
    4. Keeping the above in view, the company accounts for capital work-in-progress in the following manner:
    (a) For civil works: 90% of the value of work completed and certified by the principal consultant is booked as capital WIP (being 10% towards adjustment of mobilisation advance and 80% towards progress payments).
    (b) For supply, and erection and fabrication contracts: 85% of the value of work completed or supply made as certified by the principal consultant is booked as capital WIP (being 10% towards adjustment of mobilisation advance and 75% towards progress payments).
    (c) The balance (10% or 15% of the contract price, as the case may be) is not accounted for till the issuance of preliminary acceptance certificate, commissioning certificate and final acceptance certificate as provided in the contract.
    B. Queries
    5. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
    (a) Whether the accounting policy followed by the company is correct.
    (b) Whether the method of accounting for capital work-in-progress is correct.
    (c) Whether the method of not accounting for 10% of the contract price in the case of civil contracts, and 15% of the contract price in the case of supply or erection or fabrication contracts, pending final certification is correct.
    (d) If the answer to (a) is in the negative, what should be the correct accounting policy and method of accounting to be followed by the company?
    D. Opinion
    On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 5:
    (a) The accounting policy followed by the company as described in paragraph 3 above is not correct. The capital work-in-progress should reflect the stage of contract performance to the extent it can be measured reliably.
    (b) Please see (a) above.
    (c) Please see (a) above.
    (d) Please see (a) above.

    Opinion finalised by the Committee on 22.4.2000.



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    Thumbs up Applicability of Accounting Standard (AS) 7 to an unsold site

    Query: Applicability of Accounting Standard (AS) 7 to an unsold site.
    1. A public sector undertaking, registered under the Companies Act, 1956, undertakes as a part of its activities, construction of properties and sells the same. Following is the Accounting Policy followed by the company for accounting of profits in construction contracts:

    “Profit is recognised on percentage of completion method which is further reduced to 80% for keeping an appropriate allowance for future unforeseeable factors in cost and sale prices till the project is fully completed.”

    2. The querist has stated that the above accounting policy has been framed keeping in view Accounting Standard (AS) 7 on ‘Accounting for Construction Contracts’ which, inter alia, according to the querist, permits booking of profit on percentage of completion method. The above method of booking profit was chosen, since the project is spread over many financial years and booking of profit in one year would have given very erratic movement of the profit in that year. The calculation of percentage of completion is made by dividing work in progress by estimated cost of the project as on 31.3.1995.

    3. One of the projects which the company undertook had two different sites. While one site was sold and part payment received, the other site was yet to be allotted/sold to any party. However, for the purpose of booking estimated profit, it was felt that the profit on unsold site should also be booked. Accordingly, the sale price for unsold site was also worked out on the basis of the price at which another site was sold and the total profit was calculated with reference to the total sale price of both the sites and the total estimated expenditure of all the sites which was further limited by applying percentage of completion worked out as stated above and the profit so calculated was further reduced to 80 percent as per the accounting policy and the result was included in the profit and loss account as notional profit.

    4. Auditors are of the view that in the absence of agreement for sale, application of percentage of completion method in the case in against the accepted accounting principles and the Accounting Standard (AS) 7 is not relevant where an agreement for sale does not exist. However, the management is of the view that Accounting Standard 7 is applicable irrespective of the fact that one site is yet to be sold since outcome of the project/sale price has been reasonably estimated and is considered to be on low side keeping in view that an offer letter from a builder has been received who has offered higher prices than what was considered above for working out notional profit and the higher reserve prices fixed by company for unsold property.

    5. The opinion of the Expert Advisory Committee is sought on whether notional profit can be booked using percentage completion method under Accounting Standard (AS) 7 on unsold site.


    Opinion April 19, 1996

    1. The Committee notes para 1 of Accounting Standard (AS) 7 on ‘Accounting for Construction Contacts’, issued by the Institute of Chartered Accountants of India, which states as below:

    “The statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts (hereafter referred to as ‘contractors’). This statement also applies to enterprises undertaking construction activities of the type dealt within this statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreement for sale.” (emphasis added)

    2. Based on the above, the Committee is of the opinion in respect of the issue raised at para 5 of the query that no profit can be booked using percentage of completion method in view of the fact that there is no agreement of sale. In any case, in accounting, no profit can be booked on a notional basis

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    Thumbs up Inclusion of indirect costs in the total contract cost

    A. Facts of the Case

    1. A consultancy and engineering company engaged in design and project management activities in the petroleum sector undertakes work in the areas of petrochemicals, oil and natural gas, pipelines, ocean engineering, ports and harbours, power, metallurgy, cement, paper, etc.
    2. According to the querist, during the course of audit of accounts for the year 1996-97, government auditors have expressed certain reservations with regard to non-provision of foreseeable losses and commented that the treatment adopted by the company is not in line with paragraph 13 of Accounting Standard (AS) 7, ‘Accounting for Construction Contracts’, read with paragraph 19 of the same Standard.
    3. The accounting policy of the company for recognition of revenue is as below:
    “I. Turnover
    Income from services rendered is accounted for:
    (a) in the case of cost-plus jobs, on the basis of amount billable under the contracts;
    (b) in the case of lumpsum contracts, as proportion of actual direct costs of the work to latest estimated total direct costs of the work or in proportion to work estimated to have been executed, whichever is less; and
    (c) in the case of contracts providing for a percentage fee on equipment/project cost, on the basis of physical progress as certified;
    and after adjusting the obligation towards guarantees, warranties and penalties etc., provided/under negotiation in the respective contracts. However, in regard to contracts where guarantees, warranties, penalties etc. are to the extent of 100% of the contract value, the same is restricted to the exposure of the company towards such contracts by way of performance bond/guarantees etc.
    II. Turnover/Work-in-Progress
    (1) No income is taken into account in respect of jobs for which:
    (a) the terms of remuneration receivable by the company have not been settled and/or scope of work has not been clearly defined and, therefore, it is not possible in the absence of settled terms to determine whether there is a profit or loss on such jobs. However, in cases where minimum undisputed terms have been agreed to by the clients, income has been accounted for on the basis of such undisputed terms though the final terms are still to be settled.
    (b) the terms have been agreed to at lumpsum basis but:
    (i) the physical progress is less than 25%;
    (ii) supply of equipment is not complete in case of works contracts.
    Costs of jobs as above are carried forward as work-in progress.
    (2) While determining the work-in-progress overheads incurred at head office and other offices are not considered.”
    4. According to the querist, as regards cost-plus jobs, the company recognises revenue as and when the expenditure is incurred. The invoices to the clients are raised broadly under the following heads:
    (i) payroll cost;
    (ii) out-of-pocket expenses; and
    (iii) fee.
    The overheads of the company are billed to the clients at a fixed percentage of the payroll cost. This percentage is worked out on the basis of previous year’s data and applied in the following year. As the payroll cost, out-of-pocket expenses, fee and overheads are recovered, there is no question of having any direct losses on these jobs since these are cost-plus jobs.
    5. In respect of lumpsum contracts, the company raises its invoices on the clients on the basis of milestones stated in the contract. It recognises income on lumpsum jobs in the following manner:
    (i) No income is recognised when the progress of job is less than 25%. While determining the work-in-progress, overheads incurred at head office and other offices are not included in work-in-progress and are charged to the profit and loss account in the respective years.
    (ii) Income is recognised in the same proportion which the actual direct cost of the work done bears to the latest estimated total direct cost of the work, or in proportion to the work estimated to have been executed, whichever is less.
    For this purpose, the company draws revised cost estimates at the end of each financial year.
    6. According to the querist, the government auditors have pointed out three cases in which, according to them, the company has not provided for the foreseeable losses to the extent of Rs. 267.39 lakhs. As per the querist, the auditors, in their report, have stated that paragraph 13 of AS 7, read with paragraph 19 of the same Standard, requires that the foreseeable losses on the entire contract should be provided for in the financial statements irrespective of the amount of work done and method of accounting followed.
    7. According to the querist, the government auditors, while working out the losses, have taken into account the indirect costs also besides direct costs. This, according to the querist, is not correct in the context of the accounting policy followed by the company in respect of indirect costs, viz., to charge them off to the profit and loss account in the year of incurrence. The querist’s contention is that there are no foreseeable direct losses on the jobs based on revised direct cost estimates.
    B. Queries

    8. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
    (a) Whether the treatment adopted by the company in respect of exclusion of indirect costs in computing the total contract cost as explained above is as per the generally accepted accounting principles.
    (b) If the treatment adopted by the company is correct, whether any further disclosure in the accounting policy of the company is called for.
    (c) If the treatment adopted by the company is not correct, what is the correct manner of accounting for foreseeable losses or disclosure thereof.

    D. Opinion

    Based on the above, the Expert Advisory Committee is of the following opinion on queries raised in paragraph 8 above:
    (a) If the indirect costs under reference are of the nature described in paragraph 8.6 of AS 7, their non-inclusion in contract cost is not appropriate. On the other hand, if these costs are of the nature described in paragraph 8.7 of AS 7, they should not be included in contract cost (unless they are specifically attributable to a contract).
    (b) See (a) above.
    (c) The foreseeable losses should be provided for on the basis of the estimate of total contract cost including the indirect costs of the nature described in paragraph 8.6 of AS 7.

    Opinion finalised by the Committee on 4.3.1999.

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    Thumbs up Applicability of revised AS 7 to enterprises undertaking construction activities on their own account as a venture of commercial nature

    A. Facts of the Case

    1. A company is a joint sector enterprise promoted jointly by West Bengal Housing Board and another private sector company. The company is engaged in the business of developing mass scale housing projects, which, inter alia, include development of small commercial complexes (hereinafter collectively referred to as ‘housing projects’).

    2. The aforesaid activities are undertaken by the company on its own account and not on contractual basis, i.e., on a project being conceived, designs and drawings are finalised, land is procured, some initial developmental activities are carried out by the company, and thereafter flats/commercial spaces (shop, office, etc.) are offered to the public for booking/sale through advertisements followed by allotment of the same usually by way of lottery to the successful allottees (eventual owners). Allotment is documented by way of an allotment letter to each allottee. The letter bears reference to the brochure (i.e., offer document), which, inter alia, contains various terms and conditions. Consideration for a flat/commercial space is payable in a phased manner normally linked to various stages of completion of construction. Major construction activities pertaining to buildings are usually undertaken after allotment process as aforesaid is over. After completion of construction, possession of flats/commercial spaces is handed over to the respective allottees followed by execution of deeds/other legal documents in their favour evidencing ownership of properties.

    3. The company has, hitherto, been recognising revenue under percentage of completion method and valuing work-in-progress in its books of account as per Accounting Standard (AS) 7, ‘Accounting for Construction Contracts’, issued by the Institute of Chartered Accountants of India in December 1983,as the said Standard was also applicable to enterprises undertaking construction activities not as contractors but on their own account as a ventureof commercial nature.

    4. AS 7 has recently been revised and the same comes into effect in respect of all contracts entered into during accounting periods commencing on or after 01.04.2003, for the purpose of preparation of the financial statements of the contractors. The revised AS 7 is silent about its applicability to construction activities undertaken by enterprises on their own account and not as contractors.

    B . Query

    5. In the light of the above, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

    (a) Whether the revised AS 7 would be applicable to the company for accounting for new housing projects, which may be undertaken by the company on or after 01.04.2003 on the same business model as mentioned in the facts of the case.

    (b) In case revised AS 7 is not applicable to the company, whether the company can value its inventories in accordance with Accounting Standard (AS) 2, ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, considering the definition of inventory as ‘an asset in the process of production for the purpose of sale’, i.e., whether the activity of developing housing projects on its own account as a commercial venture by the company can be construed as a production activity.

    (c) If the activities of the company cannot be considered as a production activity and consequently AS 2 is also not applicable, which Accounting Standard should be followed for recognition of revenue and valuation of its construction work-in-progress?

    D. Opinion

    On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 5 above

    (a) The revised AS 7 would not be applicable to the company for accounting for new housing projects which are undertaken by the company during the accounting periods commencing on or after 1.4.2003.

    (b) The activity of developing housing projects on its own account as a commercial venture by the company is of the nature of production activity and, therefore, should be construed as such. The inventories should be valued by the company in accordance with AS 2 as explained in paragraph 9 above.

    (c) AS 2 is relevant for valuation of inventories including construction work-in-progress and not for recognition of revenue. AS 9 would be relevant for recognition of revenue.


    Opinion finalised by the Committee on 16.7.2003.

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    Thumbs up Disclosure of “Amounts Billed to Clients” and “Work-in-Progress”

    Query

    1. A Government of India company is mainly executing turnkey projects including jobs of civil works, erection and commissioning of coal and material handling plants, sugar projects, etc. The projects undertaken are spread over a number of years.


    2. The accounting procedure followed by the company is as follows:


    (i) As and when the running bills are raised on the clients, the clients accounts are debited and the corresponding credit is given to “Amount Billed to Clients A/c”, which is not an income head. The monies received from the clients are credited to their account and thus the amount shown as debtors goes down.


    (ii) The amount to be credited to income is derived from the evaluation of work-in-progress. The method of evaluation is described in the notes forming part of the accounts. The relevant note is reproduced below:

    “Accounting for valuation of work-in-progress:


    (i) Work-in-progress has been valued by taking actual costs incurred plus profit allocated on “Percentage of Completion Method” which is as follows:


    Extent to which job is completed

    based on estimated cost


    Percentage of profit taken into account

    (a) Upto completion of 25%
    Nil

    (b) Above 25% till completion
    80% of estimated profit

    (c) On completion of the job
    Balance of 100% profit


    Estimated profit of each project has been worked out after taking into account the latest estimated costs, based on actuals plus commitments plus cost estimates for commitments yet to be made.

    (ii) In respect of projects where loss is anticipated, work-in-progress has been valued after making adjustments for proportionate loss.

    (iii) The additions to work-in-progress are credited as value of work done for the year and taken to income.


    (iv) In view of the turnkey nature of contracts, the gross value of ‘amount billed to clients’ is carried forward and shown separately under liabilities till the projects are closed for accounting proposes. On closure of a project, the value of work-in-progress of corresponding project is set off against such credits”. Work-in-progress, i.e., value of work done for the year, connotes the debit, the corresponding credit being given to the income head “work done for the year.”


    (iii) In view of the turnkey nature of the contracts, the gross value of amount billed to clients is carried forward and on completion of the project it is set-off against the value of work-in-progress. On completion of any project, the ‘Amount Billed to Clients A/c’ and ‘Work-in-Progress Account’ become equal.


    (iv) The credit head “Amount Billed to Clients” is neither a present nor a future liability and correspondingly the work-in-progress denotes aggregated value of work done but is not an asset of the company.


    (v) In past, i.e., upto 31-3-85, the company was exhibiting the “Amount Billed to Clients” under the head “Current Liabilities” and “Work-in-Progress” was exhibited under the head “Current Assets, Loans and Advances”. By exhibiting these two items under current liabilities and current assets, the company was of the view that the current ratio was not being indicated correctly. In view of this, the company in 1985-86 changed its policy and exhibited the “Amount Billed to Clients” under liabilities distinctly with a separate heading after the ‘Loan Funds’ (1985-86 Balance Sheet-Liabilities side). Similarly, the “Work-in-Progress” is shown distinctly under “Application of Funds” after ‘Fixed Assets’. As the company has changed its policy, the fact was mentioned in “Notes forming part of the Accounts”. The present joint statutory auditors have also concurred with the view of the company, explained above.


    3. The Member Audit Board and Ex-officio Director of Commercial Audit was of the opinion that the two heads of accounts cannot be shown separately under ‘Liabilities’ and under ‘Application of funds’ as there is no provision in Schedule VI to the Companies Act, 1956 for such an exhibition. The company, in its reply, stated that as per section 211(1) of the Companies Act, 1956, the balance sheet is required to be drawn in the form set out in Part I of Schedule VI or as nearer thereto as circumstances admit. The member Audit Board, Ex-officio Director of Commercial Audit, however, has not accepted the view of the company.

    4. The Querist has sought the opinion of the Expert Advisory Committee as to whether the method of accounting followed by the company is correct or not.


    Opinion



    1. The Committee notes that the method of accounting followed by the company gives rise to a notional liability for ‘Amount Billed to Clients A/c’. Progress payments received from clients are deducted from the clients’ accounts which are shown at the amount billed to them and shown as sundry debtors.


    2. The Committee notes that the Institute of Chartered Accountants of India has issued Accounting Standard 7 (AS-7) on ‘Accounting for Construction Contracts’. AS-7 recognises that in case of construction contracts, including the turnkey type of contracts, revenue can be recognised on percentage of completion method, subject to certain conditions laid down in the Standard. The Committee presumes that the company has fulfilled those conditions in adopting the percentage of completion method.


    3. The Committee further notes that para 15 of AS-7 recommends as below:


    “15. Progress Payments, Advances and Retentions

    15.1 Progress payments and advances received from customers in respect of construction contracts in relation to the work performed thereon are disclosed in financial statements either as a liability or shown as a deduction from the amount of contract work-in-progress.

    15.2 In case progress payments and advances received from customers in respect of construction contracts are not in relation to work performed thereon, these are shown as a liability.

    15.3 Amount retained by customers until the satisfaction of conditions specified in the contract for release of such amounts are either recognised in financial statements as receivables or alternatively indicated by way of a note.”

    4. On the basis of the above, the opinion of the Committee is as follows:

    (i) The revenue should be recognised in respect of the value of work accomplished on the contracts by evaluating the work-in-progress.

    (ii) Work-in-progress should be shown under the head ‘Current Assets’ and valued at cost incurred on the contract plus profit taken thereon in accordance with the formulae followed by the company, less cash received from the clients (progress payments). Alternatively, progress payments can be shown under the head ‘Current Liabilities’.

    (iii) In view of the above, ‘Amount billed to clients A/c’ and the ‘Clients A/c’ will not appear anywhere on the ‘Liabilities’ and the ‘Assets’ side of the balance sheet.

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    Post Exposure Draft Accounting Standard 7 (Revised 20XX) Construction Contracts

    Exposure Draft
    Accounting Standard 7 (Revised 20XX)

    (Corresponding to IAS 11)
    Construction Contracts
    The following is the Exposure Draft of the Accounting Standard (AS) 7 (Revised 20XX), Construction Contracts, issued by the Accounting Standards Board of the Institute of Chartered Accountants of India, for comments.
    This Exposure Draft of the revised Accounting Standard includes paragraphs set in
    bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles. This Exposure Draft of the revised Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards.

    Attached Files Attached Files

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