IAS 11 - Construction Contracts Flashcards
What is the definition of a fixed price contract?
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.
What is the definition of a Construction Contract?
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.
What are the key characteristics of a fixed price contract?
> The revenue is fixed or determinable at the start of the contract
There is therefore a high degree of certainty about the amount of revenue
But there is less certainty about the costs that will be incurred.
What is the definition of a cost plus contract?
A cost plus contract is a construction contract in which the contractor is reimbursed for the construction costs plus an agreed profit margin.
What are the key characteristics of a cost plus contract?
> The contract price is the cost incurred plus an agreed profit margin
There is therefore a high degree of certainty about the profit arising
But there is less certainty about both revenue and costs
Under what circumstances can a number of small contracts be combined into a single larger one?
A number of small contracts should be combined into a single larger one if the individual contracts :
> Have been negotiated as one
> Are closely interrelated with an overall profit margin
> Are performed at the same time or consecutively
What is contract revenue?
Contract revenue is the total amount of consideration receivable under a contract.
What are contract costs?
Contract costs shall comprise :
- Costs that relate directly to the specific contract (site labour costs, costs of materials, cost of design)
- Costs that are attributable to contract activity in general and can be allocated to the contract (insurance, construction overheads)
What are examples of costs that CANNOT be allocated to a contract?
> General admin costs
Selling costs
Research and development for which reimbursement is not specified in the contract
Depreciation of idle plant and equipment that is not used on a particular contract
In the case of a fixed price contract when can the construction contract be recognised?
- Total contract revenue can be measured reliably
- Probable that the economic benefits associated with the contract will be received by the entity
- Contract costs to complete can be measured reliably
- Contract costs to date can be measured reliably.
- The stage of completion can be measured reliably
In the case of a cost plus contract when can the construction contract be recognised?
- It is probable that the economic benefits associated with the contract will flow to the entity
- The contract costs attributable to the contract can be clearly identified and measured reliably.
What happens where the estimate of contract outcome is not reliable?
Where the outcome of the contract cannot easily be estimated reliably : -
> Contract costs should be recognised immediately
> Contract revenue should only be recognised to the extent that it is probable that the costs are recoverable from the customer.
What happens if a loss is expected?
When the process of estimating the outcome of a contract results in an overall loss being forecast, the loss should be recognised immediately.
What judgements are required with IAS 11?
> The combining the contracts into a single contract
The estimation of the stage of the completion of each contract
The costs to be incurred in the future
What are the comparisons of IAS 11 and SSAP under UK GAAP?
UNDER UK GAAP : -
Service contracts would fall within the scope
UNDER IAS 11 : -
Service contracts would not fall within its scope
UNDER UK GAAP : -
Requires asset representing gross amount from customers to be split between amounts recoverable on contracts (debtors) and longterm contract balances (stocks)
UNDER IAS 11 : -
Just a single figure of gross amount from customers needs to be shown
