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AS - 07 - Construction Contracts - Companies (Accounting Standards) Rules, 2021

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..... rofit and loss. It also provides practical guidance on the application of these criteria. Scope 1. This Standard should be applied in accounting for construction contracts in the financial statements of contractors. Definitions 2. The following terms are used in this Standard with the meanings specified: 2.1 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. 2.2 A fixed price contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses. 2.3 A cost plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus percentage of these costs or a fixed fee. 3. A construction contract may be negotiated for the construction of a single asset such as a bridge, building, dam, pipeline, road, ship or tunnel. A construction contract may also deal with the construction of a number of assets which are closely i .....

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AS - 07 - Construction Contracts - Companies (Accounting Standards) Rules, 2021

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..... y provide for the construction of an additional asset at the option of the customer or may be amended to include the construction of an additional asset. The construction of the additional asset should be treated as a separate construction contract when: (a) the asset differs significantly in design, technology or function from the asset or assets covered by the original contract; or (b) the price of the asset is negotiated without regard to the original contract price. Contract Revenue 10. Contract revenue should comprise: (a) the initial amount of revenue agreed in the contract; and (b) variations in contract work, claims and incentive payments: (i) to the extent that it is probable that they will result in revenue; and (ii) they are capable of being reliably measured. 11. Contract revenue is measured at the consideration received or receivable. The measurement of contract revenue is affected by a variety of uncertainties that depend on the outcome of future events. The estimates often need to be revised as events occur and uncertainties are resolved. Therefore, the amount of contract revenue may increase or decrease from one period to the next. For example: (a) a contractor and .....

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AS - 07 - Construction Contracts - Companies (Accounting Standards) Rules, 2021

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..... s that relate directly to the specific contract; (b) costs that are attributable to contract activity in general and can be allocated to the contract; and (c) such other costs as are specifically chargeable to the customer under the terms of the contract. 16. Costs that relate directly to a specific contract include: (a) site labour costs, including site supervision; (b) costs of materials used in construction; (c) depreciation of plant and equipment used on the contract; (d) costs of moving plant, equipment and materials to and from the contract site; (e) costs of hiring plant and equipment; (f) costs of design and technical assistance that is directly related to the contract; (g) the estimated costs of rectification and guarantee work, including expected warranty costs; and (h) claims from third parties. These costs may be reduced by any incidental income that is not included in contract revenue, for example, income from the sale of surplus materials and the disposal of plant and equipment at the end of the contract. 17. Costs that may be attributable to contract activity in general and can be allocated to specific contracts include: (a) insurance; (b) costs of design and technic .....

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AS - 07 - Construction Contracts - Companies (Accounting Standards) Rules, 2021

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..... . 22. In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied: (a) total contract revenue can be measured reliably; (b) it is probable that the economic benefits associated with the contract will flow to the enterprise; (c) both the contract costs to complete the contract and the stage of contract completion at the reporting date can be measured reliably; and (d) the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates. 23. In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied: (a) it is probable that the economic benefits associated with the contract will flow to the enterprise; and (b) the contract costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably. 24. The recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage of completion method. .....

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AS - 07 - Construction Contracts - Companies (Accounting Standards) Rules, 2021

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..... : (a) the proportion that contract costs incurred for work performed upto the reporting date bear to the estimated total contract costs; or (b) surveys of work performed; or (c) completion of a physical proportion of the contract work. Progress payments and advances received from customers may not necessarily reflect the work performed. 30. When the stage of completion is determined by reference to the contract costs incurred upto the reporting date, only those contract costs that reflect work performed are included in costs incurred upto the reporting date. Examples of contract costs which are excluded are: (a) contract costs that relate to future activity on the contract, such as costs of materials that have been delivered to a contract site or set aside for use in a contract but not yet installed, used or applied during contract performance, unless the materials have been made specially for the contract; and (b) payments made to subcontractors in advance of work performed under the subcontract. 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; .....

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AS - 07 - Construction Contracts - Companies (Accounting Standards) Rules, 2021

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..... contracts which are not treated as a single construction contract in accordance with paragraph 8. Changes in Estimates 37. The percentage of completion method is applied on a cumulative basis in each accounting period to the current estimates of contract revenue and contract costs. Therefore, the effect of a change in the estimate of contract revenue or contract costs, or the effect of a change in the estimate of the outcome of a contract, is accounted for as a change in accounting estimate (see Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies). The changed estimates are used in determination of the amount of revenue and expenses recognised in the statement of profit and loss in the period in which the change is made and in subsequent periods. Disclosure 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 .....

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AS - 07 - Construction Contracts - Companies (Accounting Standards) Rules, 2021

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..... e estimated total costs of the contract. The Determination of Contract Revenue and Expenses The following illustration 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 herein below 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 e .....

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AS - 07 - Construction Contracts - Companies (Accounting Standards) Rules, 2021

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..... see above) 145 520 380 200 55 1,300 Progress Billings (paragraph 40) 100 520 380 180 55 1,235 Unbilled Contract Revenue 45 - 20 - 65 Advances (paragraph 40) - 80 20 - 25 125 The amounts to be disclosed in accordance with the Standard are as follows: Contract revenue recognised as revenue in the period [paragraph 38(a)] 1,300 Contract costs incurred and recognised profits (less recognised losses) upto the reporting date [paragraph 39(a)] 1,435 Advances received [paragraph 39(b)] 125 Gross amount due from customers for contract work - presented as an asset in accordance with paragraph 41(a) 220 Gross amount due to customers for contract work - presented as a liability in accordance with paragraph 41(b) (20) The amounts to be disclosed in accordance with paragraphs 39(a), 41(a) and 41(b) are calculated as follows: (amount in Rs. lakhs) A B C D E Total Contract Costs incurred 110 510 450 250 100 1,420 Recognised profits less recognised losses 35 70 30 (90) (30) 15 Progress billings Due from customers 145 580 480 160 70 1,435 Due to customers 100 520 380 180 55 1,235 45 60 100 - 15 220 - (20) - (20) The amount disclosed in accordance with paragraph 39(a) is the same as the amount for th .....

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AS - 07 - Construction Contracts - Companies (Accounting Standards) Rules, 2021

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