AS 7 Construction Contracts (revised 2002)

· Applicable to accounting for construction contract.

· Construction contract may be for construction of a single/combination of interrelated or interdependent assets.

· A fixed price contract is a contract where contract price is fixed or per unit rate is fixed and in some cases subject to escalation clause.

· A cost plus contract is a contract in which contractor is reimbursed for allowable or defined cost plus percentage of these cost or a fixed fee.

· In a contract covering a number of assets, each asset is treated as a separate construction contract when there are:

· separate proposal;

· subject to separate negotiations and the contractor and customer is able to accept/reject that part of the contract;

· identifiable cost and revenues of each asset

· A group of contracts to be treated as a single construction contract when

· they are negotiated as a single package;

· contracts are closely interrelated with an overall profit margin; and

· contracts are performed concurrently or in a continuous sequence.

· Additional asset construction to be treated as separate construction contract when

· assets differs significantly in design/technology/function from original contract assets.

· a price negotiated without regard to original contract price

· Contract revenue comprises of

· initial amount and

· variations in contract work, claims and incentive payments that will probably result in revenue and are capable of being reliably measured.

· Contract cost comprises of

· costs directly relating to specific contract

· costs attributable and allocable to contract activity

· other costs specifically chargeable to customer under the terms of contracts.

· Contract Revenue and Expenses to be recognised, when outcome can be estimated reliably up to stage of completion on reporting date.

· In Fixed Price Contract outcome can be estimated reliably when

· total contract revenue can be measured reliably.

· it is probable that economic benefits will flow to the enterprise;

· contract cost and stage of completion can be measured reliably at reporting date; and

· contract costs are clearly identified and measured reliably for comparing actual costs with prior estimates.

· In cost plus contract outcome is estimated reliably when

· it is probable that economic benefits will flow to the enterprise; and

· contract cost whether reimbursable or not can be clearly identified and measured reliably.

· When outcome of a contract cannot be estimated reliably

· revenue to the extent of which recovery of contract cost is probable should be recognised;

· contract cost should be recognised as an expense in the period in which they are incurred; and

· An expected loss should be recognised as expense.

· When uncertainties no longer exist revenue and expenses to be recognised as mentioned above when outcomes can be estimated reliably.

· When it is probable that contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately.

· Change in estimate to be accounted for as per AS 5.

· An enterprise to disclose

· contract revenue recognised in the period.

· method used to determine recognised contract revenue.

· methods used to determine the stage of completion of contracts in progress.

· For contracts in progress an enterprise should disclose

· the aggregate amount of costs incurred and recognised profits (less recognised losses) up to the reporting date.

· amount of advances received and

· amount of retention.

· An enterprise should present

· gross amount due from customers for contract work as an asset and

· the gross amount due to customers for contract work as a liability.