accounting standards 7 to be followed?

This query is : Resolved

NIKUNJ (Querist)
Follow

13 October 2016 company is engaged in infrastructure development so the accounting methods to be applied as per as7…¿¿?¡

NIKUNJ

NIKUNJ (Querist)
Follow

23 October 2016 ompany is engaged in infrastructure development so the accounting methods to be applied as per as7…¿¿

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

14 July 2024 As per Accounting Standard 7 (AS 7) "Construction Contracts," companies engaged in infrastructure development are required to follow specific accounting methods and principles to account for revenue and costs associated with construction contracts. Here’s how AS 7 applies to infrastructure development companies:

### Key Principles of AS 7:

1. **Identification of Construction Contracts:**
- AS 7 defines a construction contract as 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, or function.
- Infrastructure development projects such as roads, bridges, airports, and buildings typically fall under the scope of construction contracts.

2. **Contract Revenue Recognition:**
- **Percentage of Completion Method (POCM):** Under AS 7, revenue from construction contracts should be recognized based on the percentage of completion of the contract activities.
- This method requires estimating the percentage of work completed periodically, based on the proportion of contract costs incurred to date relative to total estimated contract costs.

3. **Contract Costs:**
- All costs attributable to the construction contract that can be measured reliably should be included in the contract costs.
- Contract costs include direct costs (such as materials, labor, and subcontractor costs) and attributable overheads that are directly related to the contract.

4. **Recognition of Contract Losses:**
- A provision for expected contract losses should be recognized as soon as it is probable that total contract costs will exceed total contract revenue.
- Contract losses are recognized immediately in the profit and loss account (income statement).

5. **Disclosure Requirements:**
- AS 7 requires specific disclosures in the financial statements, including the amount of contract revenue recognized as revenue in the period, the methods used to determine contract revenue recognized, and the stage of completion of contracts.

### Application to Infrastructure Development:

- **Large-Scale Projects:** Infrastructure projects often involve long-term contracts with significant costs and risks. AS 7 helps in systematically recognizing revenue and costs over the contract period, providing transparency and reliability in financial reporting.

- **Contract Modifications:** AS 7 provides guidance on how to account for contract modifications, ensuring that any changes in contract scope or consideration are appropriately reflected in the financial statements.

### Conclusion:

For a company engaged in infrastructure development, compliance with AS 7 ensures consistent and appropriate accounting for construction contracts. By applying the percentage of completion method and adhering to the principles outlined in AS 7, companies can accurately reflect the financial performance and status of their construction contracts in their financial statements. This enhances transparency and provides stakeholders with reliable information about the company's revenue recognition and contract performance.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now