Notes on as - 7 (a small contribution)

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