Accounting Treatment and AS

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Sam (Querist)
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13 February 2010 Dear All,
We have a client engaged in residential flat contruction. The project is not yet completed. Can The normal admin expenses and other expenses not directly connected to construction, cna it be taken to WIP and showing a nil P&L account.

Please quote the relevant AS and note to accounts on the same

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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13 February 2010 In your case AS-7 will be applicable, in the project you are not billed any thing but expenses incurred you need to show as WIP only

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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14 February 2010 Revenue has to be booked on % of completion method as prescribed in AS-7. Since project has been commenced, question of WIP does not arise, if AS-7 is followed.

DEEPIKA GOEL

DEEPIKA GOEL (Expert)
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14 February 2010 As per AS-7, construction contracts,
Contract costs includes the following:-
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and
can be allocated to the contract; and
(c) such other costs as are specifically chargeable to the customer
under the terms of the contract
Such costs are allocated using methods that are systematic and rational and
are applied consistently to all costs having similar characteristics. The
allocation is based on the normal level of construction activity. Construction
overheads include costs such as the preparation and processing of construction
personnel payroll. Costs that may be attributable to contract activity in general
and can be allocated to specific contracts also include borrowing costs as
per Accounting Standard (AS) 16, Borrowing Costs.

So, on the basis of above, we can conclude that the normal admin expenses and other expenses those not directly connected to the contract can be part of the contract cost. But have to allocate on some basis e.g
Admin deptt take care of payroll, billing and accounting and other aspects but its policy of the company how and how much to allocate indirect expenses. It depends upon the projects handling and other aspects also.

Sam

Sam (Querist)
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15 February 2010 Thanks for the reply

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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15 February 2010 Yes.I do agree with Mr.Chackrapani warrier

If the percentage of completion as per AS 7 followed WIP question will not arise total expenses will go to Unbilled revenue

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