ACCOUNTING STANDARD – 7
ACCOUNTING FOR CONSTRUCTION ( C * )CONTRACTS
* C in the below notes indicates Contract
RECCOMENDED METHOD -- %age of completion
– accrual basis of accounting for long term contracts
· As per this AS, the C revenue & C cost to the accounting period in which construction works performed
APPICABILITY
· It applies to contractors accounts and not contractee accounts
· It does not apply to own construction contracts of any enterprise
CONTRACT MEANS
· As per the accounting standard, accounting standard construction C is a C per specifically negotiated for the construction of an asset or interrelated assets
· It also includes rendering of services which are directly related to construction of assets & for destruction or restoration of asset and restoration of envt., following the demolition of the asset
TYPES OF CONTRACT
· Fixed price C – C is undertaken on Fixed rate per unit, escalation clause
· Cost plus C cost at fixed percentage of fee or profit
· Mix of both
COMBINING & SEGMENTING OF ASSETS
· As per this AS the profit/loss is calculated separately for each C, but when the contracts ( two or more ) are part of a single project by combining two or more projects.
ADJUSTMENT
· When an asset is indepedent of original C then such contructon of the Asset is treated separately.
PROFIT OR LOSS OF CONSTRUCTION C – C Revenue means revenue/price of C + Revenue due to escalation clause + claims + revenue increrase due to increase in output + Increase/decrease in revenue due to change in scope of work + Incentive payments+ penalties
MEASUREMENT OF C REVENUE & EXPENSES by reference to the %age of completion. The Revenue is recognized as revenue in p & l stt.. in accounting period in which work is performed
%age fo completion = cost to date / (cumulative cost + est cost to complete) *100
EXCLUSION FROM COST – Cost related to future
– Advance payment to sub contract
PRINCIPLES OF RECOGNITION OF REVENUE & EXPENDITURE - revenue & exp are recognized in d period in which work is performed
CONDITIONS to recognize C revenue are – the total C measured reliabily
– economic benefits that flow is probable
– Total C cost is clearly identified.
When uncertinity arise regarding C revenue already recognized, then such uncollectable amt is treated a C expense rather than adjustment in C Revenue.
COST CONSISTS
· COST = {Labour cost + material + Dep on plant & equipment + cost of moving P&E ( Plant & equipment) + cost of moving P&E & material from C site + plant hire cost + design cost + estimated rectification csost & guarantee work including warrenty cost + claims from third party pre-C cost(if it is probable that C will be attained) +design & technical assistance } – (incidental income i.e., sale of surplus/scrap material or disposal of P&E at the end of C
· COST ATTRIBUTABLE to C are Insurance +Cost of design & technical assistance i.e., not related to specific C
· COST SPECIFICALLY chargeable from customers under terms of C are general adm cost & development cost + Any other cost of reimbursement.
· COST TO BE EXCLUDED are general admin cost +selling cost + Research & Development + Dep on idle p&l + pre C cost if there is no probability that C will be obtained
PROVISION FOR EXPECTED LOSSES.. if it is probable then total C cost –total C income = expected losses, i., recognized as are expense irrespective of, --- The work has commenced
--- Stage of completion of C
E FFECT OF CHANGE IN RELIABLE ESTIMATE in construction C to recognize the revenue & expense should be in accordance as the accounting estimate as per AS – V & the estimate should be same for each accounting period
DISCLOSURE of this policy of disclosure are --- THE METHOD USED TO FIND STAGE OF COMPLETION of C in progress
--- THE METHOD USED TO FIND C revenue recognize in asset
Eg:- Total labour hours
--- The amout of C revenue recognized in d period C cost incurred & reg profit (
recgd loss ) up to the reporting period
--- Advance received
--- Gross amt due from customer for C work
Turnover as per AS – 7 :- The amount of C revenue recognized as revenue is p&l stt as per AS-7 should be considered as considered as turnover
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