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Thread: 07 Accounting Standard 7 - Construction Contract - AS 7

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    Default Disclosure of Accounting Standard 7 - Construction Contract - AS 7

    Disclosure of Accounting Standard 7 - Construction Contract - AS 7


    38. An enterprise should disclose:


    (a) the amount of contract revenue recognised as revenue in the period;

    (b) the methods used to determine the contract revenue recognised in the period; and

    (c) the methods used to determine the stage of completion of contracts in progress.

    39. An enterprise should disclose the following for contracts in progress at the reporting date:


    (a) the aggregate amount of costs incurred and recognised profits (less recognised losses) upto the reporting date;


    (b) the amount of advances received; and

    (c) the amount of retentions.

    40. Retentions are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified. Progress billings are amounts billed for work performed on a contract whether or not they have been paid by the customer. Advances are amounts received by the contractor before the related work is performed.

    41. An enterprise should present:

    (a) the gross amount due from customers for contract work as an asset; and

    (b) the gross amount due to customers for contract work as a liability.


    42. The gross amount due from customers for contract work is the net amount of:


    (a) costs incurred plus recognised profits; less

    (b) the sum of recognised losses and progress billings for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceeds progress billings.


    43. The gross amount due to customers for contractwork is the net amount of:

    (a) the sum of recognised losses and progress billings; less

    (b) costs incurred plus recognised profits for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses).

    44. An enterprise discloses any contingencies in accordance with Accounting Standard (AS) 4, Contingencies and Events OccurringAfter the Balance Sheet Date4. Contingencies may arise from such items as warranty costs, penalties or possible losses.

  2. #12
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    Default Appendix of Accounting Standard 7 - Construction Contract - AS 7

    Appendix of Accounting Standard 7 - Construction Contract - AS 7


    The appendix is illustrative only and does not form part of the Accounting Standard. The purpose of the appendix is to illustrate the application of the Accounting Standard to assist in clarifying its meaning.

    Disclosure of Accounting Policies
    The following are examples of accounting policy disclosures:


    Revenue from fixed price construction contracts is recognised on the percentage of completion method, measured by reference to the percentage of labour hours incurred upto the reporting date to estimated total labour hours for each contract. Revenue from cost plus contracts is recognised by reference to the recoverable costs incurred during the period plus the fee earned, measured by the proportion that costs incurred upto the reporting date bear to the estimated total costs of the contract.

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    Default The Determination of Contract Revenue and Expenses of Accounting Standard 7 - Construction Contract - AS 7

    The Determination of Contract Revenue and Expenses of Accounting Standard 7 - Construction Contract - AS 7


    The following example illustrates one method of determining the stage of completion of a contract and the timing of the recognition of contract revenue and expenses (see paragraphs 21 to 34 of the Standard). (Amounts shown hereinbelow are in Rs. lakhs)


    A construction contractor has a fixed price contract for Rs. 9,000 to build a bridge. The initial amount of revenue agreed in the contract is Rs. 9,000. The contractor’s initial estimate of contract costs is Rs. 8,000. It will take 3 years to build the bridge.


    By the end of year 1, the contractor’s estimate of contract costs has increased to Rs. 8,050.

    In year 2, the customer approves a variation resulting in an increase in contract revenue of Rs. 200 and estimated additional contract costs of Rs. 150. At the end of year 2, costs incurred include Rs. 100 for standard materials stored at the site to be used in year 3 to complete the project. The contractor determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed upto the reporting date bear to the latest estimated total
    contract costs. A summary of the financial data during the construction period is as follows:

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    Contract Disclosures of Accounting Standard 7 - Construction Contract - AS 7


    A contractor has reached the end of its first year of operations. All its contract costs incurred have been paid for in cash and all its progress billings and advances have been received in cash. Contract costs incurred for contracts B, C and E include the cost of materials that have been purchased
    for the contract but which have not been used in contract performance upto the reporting date. For contracts B, C and E, the customers have made advances to the contractor for work not yet performed.

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    Default Appendix of Accounting Standard 7 - Construction Contract - AS 7

    Appendix of Accounting Standard 7 - Construction Contract - AS 7


    Click here for Appendix

    http://www.knowledgebible.com/forum/...tion-Contracts

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    Default Turnover in case of Contractors of Accounting Standard 7 - Construction Contract - AS 7

    Accounting Standards Interpretation (ASI) 29
    Turnover in case of Contractors
    Accounting Standard (AS) 7, Construction Contracts
    (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’.

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    Default CONSENSUS of Accounting Standard 7 - Construction Contract - AS 7

    CONSENSUS of Accounting Standard 7 - Construction Contract - AS 7


    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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    Default BASIS FOR CONCLUSIONS of Accounting Standard 7 - Construction Contract - AS 7

    BASIS FOR CONCLUSIONS of Accounting Standard 7 - Construction Contract - AS 7

    3. The paragraph dealing with the ‘Objective’ of AS 7 provides as follows:

    "Objective

    The objective of this Statement is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods. Therefore, the primary issue in accounting for construction contracts is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. This Statement uses the recognition criteria established in the Framework for the Preparation and Presentation of Financial Statements to determine when contract revenue and contract costs should be recognized as revenue and expenses in the statement of profit and loss. It also provides practical guidance on the application of these criteria.”


    From the above, itmay be noted that AS 7 deals, inter alia,with the allocation of contract revenue to the accounting periods in which construction work is performed.


    4. Paragraphs 21 and 31 of AS 7 provide as follows:

    “21. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and
    expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognised as an expense
    immediately in accordance with paragraph 35.”


    “31. When the outcome of a construction contract cannot be estimated reliably:
    (a) revenue should be recognised only to the extent of contract costs incurred of which recovery is probable; and

    (b) contract costs should be recognised as an expense in the period in which they are incurred.


    An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35.” From the above, it may be noted that the recognition of revenue as per AS 7 may be inclusive of profit (as per paragraph 21 reproduced above) or exclusive of profit (as per paragraph 31 above) depending on whether the outcome of the construction contract can be estimated reliably or not. When the outcome of the construction contract can be estimated reliably, the revenue is recognised inclusive of profit and when the same cannot be estimated reliably, it is
    recognised exclusive of profit. However, in either case it is considered as revenue as per AS 7.


    5. ‘Revenue’ is a wider term. For example, within the meaning of AS 9, Revenue Recognition, the term ‘revenue’ includes revenue from sales transactions, rendering of services and from the use by others of enterprise resources yielding interest, royalties and dividends. The term ‘turnover’ is
    used in relation to the source of revenue that arises fromthe principal revenue generating activity of an enterprise. In case of a contractor, the construction activity is its principal revenue generating activity. Hence, the revenue recognised in the statement of profit and loss of a contractor in accordance with the principles laid down inAS7, bywhatever nomenclature described in the financial statements, is considered as ‘turnover’.

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    Default Cut-off date for capitalisation of construction cost of Accounting Standard 7 - Construction Contract - AS 7

    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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    Default Treatment of retention money in the financial statements of a contractee of Accounting Standard 7 - Construction Contract - AS 7

    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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