Construction Contracts

Question 1

What is performance over time?

Answer 1

The entity recognises revenue over time by measuring progress on the contract to date……….how much of the work they have completed

Entity transfers control of a good or service over time, so, satisfies a performance obligation and recognises revenue over time

Question 2

What is the key principle of a construction contract?

Answer 2

spread revenue, cost and profit over the term of the contract based on the % of work done, so long as a profit can be reasonably anticipated

Question 3

What are the 4 steps of calculating revenue, cost and profit on construction contracts?

Answer 3

Step 1: Calculate overall profit or loss
Step 2: Determine progress towards completion
Step 3: Determine the figures for inclusion in statement of Profit or loss
Step 4: Determine the figures for inclusion in statement of financial position

Question 4

What are the 3 important rules of construction contracts?

Answer 4

If the expected outcome is a profit: revenue and costs should be recognised according to the progress of the contract
If the expected outcome is a loss: the whole loss should be recognised immediately. Record a provision for an onerous contract
If the expected outcome or progress is unknown:
Revenue should be recognised to the level of recoverable costs (usually costs spent to date).
No profit is recognised.

Question 5

What is step 1?

Answer 5

Step 1: Calculate overall profit or loss
Contract price X
Less: Cost to date X
Less: Costs to complete X
Overall profit/loss X/(X)

Question 6

What is step 2?

Answer 6

Determining the progress towards completion
Two acceptable methods:

Input method – costs incurred to date/total costs)
Output method – work certified (work certified to date / total revenue)
Where progress cannot be measured: revenue should be recognised only to the extent of contract costs incurred that will probably be recoverable

Question 7

What is step 3?

Answer 7

Determine figure for inclusion in Statement of Profit or Loss (if profitable)
Revenue (Total price x progress %) Less revenue recognised in previous years X
Cost of sales (Total costs x progress %) Less cost of sales recognised in previous years (X)
Gross Profit X

Question 8

What is step 3 if making a loss from step 1?

Answer 8

Revenue (Total price x progress %) Less revenue recognised in previous years X
Cost of sales (balancing figure) (X)
Total contract loss (FROM STEP 1) X

Balancing figure = (% progress x total cost ) + provision for onerous contract.

Question 9

What is step 4?

Answer 9

Costs incurred to date x
Profit / loss to date x/(x)

Less: amounts billed to date (x)
=Contact asset / liability x

Question 10

What is construction asset/ liability?

Answer 10

Alternatively, IFRS15 allows the terms receivable and work-in-progress to be used:
If revenue exceeds cash received could be included within trade receivables
If costs to date exceed cost of sales could be included within inventory as work-in-progress
If the cash received exceeds the revenue recognised to date contract liability
If a contract is loss-making provision recorded to recognise the full loss under the onerous contract (IAS37). This could either be termed as contract liability or a provision