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    AS - 7 (Revised) : Construction Contracts: By: CA Kamal Garg

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    peeyush_pruthi
    1. This accounting standard establishes principles for recognizing revenue and costs relating to construction contracts. It applies to construction and related service contracts but not to own account construction. 2. Revenue and expenses are recognized using the percentage-of-completion method if reliable estimates can be made. If not, the completed contract method cannot be used and revenue is only recognized to the extent costs are recoverable. 3. Expected losses on contracts should be recognized as an expense immediately, regardless of the stage of completion.

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    AS - 7 (Revised) : Construction Contracts: By: CA Kamal Garg

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    peeyush_pruthi
    50 views18 pages
    1. This accounting standard establishes principles for recognizing revenue and costs relating to construction contracts. It applies to construction and related service contracts but not to own account construction. 2. Revenue and expenses are recognized using the percentage-of-completion method if reliable estimates can be made. If not, the completed contract method cannot be used and revenue is only recognized to the extent costs are recoverable. 3. Expected losses on contracts should be recognized as an expense immediately, regardless of the stage of completion.

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    As 7

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    1. This accounting standard establishes principles for recognizing revenue and costs relating to construction contracts. It applies to construction and related service contracts but not to own account construction. 2. Revenue and expenses are recognized using the percentage-of-completion method if reliable estimates can be made. If not, the completed contract method cannot be used and revenue is only recognized to the extent costs are recoverable. 3. Expected losses on contracts should be recognized as an expense immediately, regardless of the stage of completion.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    50 views18 pages

    AS - 7 (Revised) : Construction Contracts: By: CA Kamal Garg

    Uploaded by

    peeyush_pruthi
    1. This accounting standard establishes principles for recognizing revenue and costs relating to construction contracts. It applies to construction and related service contracts but not to own account construction. 2. Revenue and expenses are recognized using the percentage-of-completion method if reliable estimates can be made. If not, the completed contract method cannot be used and revenue is only recognized to the extent costs are recoverable. 3. Expected losses on contracts should be recognized as an expense immediately, regardless of the stage of completion.

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    AS 7 (Revised): Construction Contracts

    By: CA Kamal Garg

    Objective
    To establish principles for recognition of revenue and costs relating to construction contracts

    Scope
    Accounting in the financial statements of Contractors Also Applicable: Service contracts directly related to construction of asset Contracts for destruction or restoration of assets Contracts for restoration of environment following demolition of assets Not Applicable: Own Account Construction Contracts, Contractee

    Types of Construction Contracts


    Fixed Price: Contract price or rate p.u. of output is fixed, with or without escalation clause Cost Plus: Revenue = Cost + Agreed Percentage

    Combining & Segmenting of Construction Contracts


    1. 2. 3.

    Combining if: Can be treated as single package; Part of single project; Performed concurrently or in a continuous sequence Segment if: Separate proposals for each asset; Each asset has been subject to separate negotiation and can be accepted or rejected; Costs & Revenues of each asset can be identified

    1. 2. 3.

    Construction of Additional Assets or Contract Options


    1.

    2.

    Combine if: Assets do not differ significantly in design, technology or function from original contracts assets; Price is not independent with regard to original contract price ELSE Segment

    Contract Revenue & Expense


    1. 2. 3.

    4.

    Revenue Initial Amount Agreed Escalations, Claims, etc. Variations in contract work, claims, incentive payments Decrease, if any, due to penalties

    Expense 1. Direct Costs 2. Allocable Costs 3. Costs specifically chargeable to the customer

    Contract Costs
    1. 2. 3. 4. 5. 6.

    7.

    Inclusions Site labour Material Depreciation on plant used on contract Cost of hiring, designing Claims from III Party Pre Contract Costs, if it is probable that contract will be obtained Net off Incidental Income if not included in Revenue (e.g. sale of scrap material)

    1. 2. 3. 4. 5. 6.

    7.

    Exclusions General Admn. O/hs. Selling costs R&D Depreciation of Idle Plant Cost incurring in securing the contract Contract Costs such as material set aside but not used and applied Payments made to subcontractors in advance of work performed under the sub-contract

    Contract Costs Relating to Future Activity


    Recovery Probable Treated as an ASSET i.e. amount due from customer Recovery Not Probable Treated as an EXPENSE of the period

    Recognition Principles
    Revenue recognised in the period in which work is performed Expense recognised in the period in which the work to which expense relate is performed If there is uncertainty in collection of amounts already included in revenue and recognised in P & L A/c, then it should be recognised as expense rather than adjusting revenue

    Method of Measurement
    Completed Contract Method NOT ALLOWED Percentage Completion Method ALLOWED

    Percentage Completion Method


    Cost to Cost Method:
    1.

    2.

    % of Completion = [(Cost to Date) x 100] / (Cumulative Cost Incurred + Estimated Cost of Completion) Current Contract Revenue = (Step 1 x Contract Price) less Revenue Previously Recognised

    Survey Method

    Recognition Criteria Contract Revenue


    Can be Reliably Estimated 1. Apply % Completion Method Cant be Reliably Estimated 1. Recognise only to the extent of such contract costs incurred the recovery of which is probable

    Recognition Criteria Contract Expenses


    Can be Reliably Estimated 1. % Completion Method; 2. Any expected loss also to be charged off ** Cant be Reliably Estimated 1. Treat as a period expense 2. Any expected loss also to be charged off

    Recognition Criteria Contract Expenses


    ** Where it is probable that total contract costs will exceed (>) total contract revenue: Expected losses should be recognised as an expense Irrespective of: Commencement of work; Stage of completion; Amount of profits on other contracts that are not treated as single contracts

    1. 2. 3.

    Changes in Estimates
    % 0f Completion is based on Estimates which may vary For this Apply AS 5

    ASI 29: Turnover


    Whether Contract Revenue as per AS 7 = Turnover YES

    Disclosures
    Method & Policy Contract Revenue & Contract Expenses Expected Losses Recognised Profits less Recognised Losses Progress Billings (i.e. Payments Recd + Payments billed but not Recd) Retentions (i.e. billed but not received from Contractee) Gross Amount due to Customers Amount Due From Customers = Contract Costs + Recognised Profits Recognised Losses Progress Billings Amount Due to Customers = If above is Negative

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