Accounting of multiple contracts under 1 company

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Guest

Guest (Querist)

08 August 2011 my client is into multiple government contract but all the contracts are clubbed under of 1 company (ABC infrastructure Ltd) with different units (eg, unit 1,2,3....). the main unit ( say HO unit) where there is no business but all the expenditure are booked & investment like in fdr & interest are also booked . at the year end all the units along with HO unit are consolidated.

since the contract is for a specific period & after completion of contract the unit is closed, so there is no point in floating a new company for every contract

my querry is i do not find this system right in terms of disclosure of exps under 1 no operation unit ,as i will not come to know the true picture of each unit as in the contract is profitable or not

can any 1 suggest me the correct accounting way to maintain these units under 1 company so that i get true sttatus of facts & Figures

any if the contract is completed & the unit is closed than accounting standard " Discounting Operation " will be attracted or not

CA. Anoop Gadia

CA. Anoop Gadia (Expert)
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08 August 2011 unit must be manage on Contribution model to determine each unit profitability.

Guest

Guest (Querist)

09 August 2011 can you please explain in detail...

Guest

Guest (Querist)

10 August 2011 can any 1 suggest better method accounting method in such case

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)
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14 July 2024 Managing multiple government contracts under one company with various units (like unit 1, 2, 3, etc.) can indeed present challenges in terms of financial reporting and understanding the profitability of each contract/unit. Here are some accounting considerations and suggestions to address these issues:

### Accounting Approach for Government Contracts with Multiple Units:

1. **Segment Reporting:**
- Implement segment reporting within the financial statements to disclose the performance of each unit (or segment) separately.
- Segment reporting helps in understanding the financial results, assets, and liabilities of each operating segment, including those units involved in different government contracts.

2. **Cost Allocation:**
- Allocate direct and indirect costs to each unit (segment) based on a suitable allocation basis (e.g., direct expenses allocated based on actual usage, and indirect expenses allocated based on a reasonable allocation key).
- This ensures that each unit's financial performance reflects its true costs and revenues related to the specific government contract.

3. **Investment and Interest Income:**
- Separate the investment income (e.g., from FDRs) earned by the HO unit from its operations and allocate it appropriately to each unit.
- This ensures that the profitability of each unit is not distorted by income earned centrally.

4. **Contract Completion and Accounting Treatment:**
- When a contract is completed and a unit is closed, assess whether it meets the criteria for 'Discontinued Operations' under accounting standards (such as Ind AS 105 or equivalent standards).
- If the unit qualifies as a discontinued operation, disclose its results separately in the financial statements until its closure.

5. **True and Fair View:**
- Ensure that the financial statements present a true and fair view of the company's financial performance and position, including clear disclosure of segment-wise information.
- Disclose any significant events or transactions that impact the financial statements, such as the closure of a unit after contract completion.

### Accounting Standards and Treatment:

- **Ind AS 105 (IFRS equivalent: IFRS 5):** Deals with 'Non-current Assets Held for Sale and Discontinued Operations'. It specifies criteria for classifying a component of an entity as discontinued and the related disclosures.
- If a unit ceases to operate after the completion of its contract and meets the criteria of being a discontinued operation, then Ind AS 105 would apply to ensure appropriate disclosure and treatment in the financial statements.

### Conclusion:

To maintain a clear understanding of the financial performance of each unit involved in government contracts under one company, implement segment reporting and appropriate cost allocation methods. This approach ensures transparency and accuracy in reporting while complying with accounting standards. Additionally, for units that cease operations after contract completion, consider the criteria under Ind AS 105 to determine if they qualify as discontinued operations for proper accounting treatment and disclosure.

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