Poojitha Raam Vinay
AS 7 Construction Contracts
(Introduced in December 1983, Revised and applicable for accounting Periods on or after April 1, 2003)
Types of Contract
Fixed Contract
In fixed Contract Price is agreed as a fixed sum.
Cost Plus Contract
It is a type of construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus percentage of these costs or a fixed fee.
Contract Revenue
Contract Cost
Measurement of contract revenue
Percentage of Completion Method: Under the Percentage completion method, the revenue is recognized in the profit and loss account in the accounting period in which work is performed.
Formulae
Recognition of contract revenue and expenses
- Contract revenue and contract costs associated with the construction contract should be recognised in accordance with the stage of completion of the contract activity at the reporting date.
- An expected loss shall be recognised immediately
In case of Fixed price contract and Cost plus Contract (when it is reliable)
When the outcome of a construction contract cannot be estimated reliably:
- revenue should be recognised only to the extent of contract costs incurred of which recovery is probable; and
- contract costs should be recognised as an expense in the period in which they are incurred. An expected loss on the construction contract should be recognised as an expense immediately.
Changes in Estimate (Para 37)
Any change in the estimate of the outcome of a contract, is accounted for as a change in the accounting estimate as per AS-5. The changed estimates are to be used to determine the amount of revenue and expense to be recognised in the profit and loss account in the period in which change is made.
Treatment of Contract Cost
Disclosure Para 38
- Contract Revenue
- Contract Cost
- Stage of Completion and the methods
- the methods used to determine the contract revenue recognised in the period
- Advance received if any
- Retention amount
- Profit recognised
- Progress Bill.
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