p17m7mqf5rja118ar1v0jodunr4.pdf

IAS 11 recognizes only the percentage-of-completion method of recognition for revenues and expenses. The “completed-contract method” whereby no contract
revenues or profits are recognized until the contracts are completed or are substantially complete is not permitted under IAS 11.
The stage of completion of a contract can be estimated by a variety of means. Depending on the nature of the contract, an entity may employ the method that
measures reliably the work performed. These include
• The proportion that costs incurred to date bear to expected total costs required to complete the contract.
• Certification or surveys of work performed.
• Completion of physical proportion of the contract work.
Very often, and as a matter of prudence, unless a contract is sufficiently far advanced, revenue is recognized only to the extent of costs incurred (i.e., zero profit is
recognized). How far is “sufficiently far advanced” is a matter of judgment. Many entities state that a contract should be at least 50% complete; others, 75%; some,
much lower percentages. Clearly hindsight can be very beneficial. If the contract is complete by the time the financial statements are authorized for issue, it is a much
simpler task to estimate the actual stage of completion at the end of the reporting period. For other cases, a robust estimating system with a proven track record of no
significant inaccuracies is a must if an entity wishes to reliably estimate final outcome when the percentage complete is low at the time of estimation.
Facts
CASE STUDY 3
Miracle Construct Inc. is executing a gigantic project of constructing the tallest building in the country. The project is expected to take three years to
complete.
The company has signed a fixed-price contract of $12,000,000 for the construction of this prestigious tower.
The details of the costs incurred to date in the first year are
Required
Site labor costs $1,000,000
Cost of construction material 3,000,000
Depreciation of special plant and equipment used in contracting to build the tallest building 500,000
Marketing and selling costs to get the tallest building in the country the right exposure 1,000,000
Total $5,500,000
Total contract cost estimated to complete $5,500,000
Calculate the percentage of completion and the amounts of revenue, costs, and profits to be recognized under IAS 11.
Solution
1. Contract cost incurred to date
Site labor cost $ 1,000,000
Material cost 3,000,000
Depreciation of special plant and equipment
500,000
$ 4,500,000
NOTE: IAS 11 does not allow “marketing and selling costs” to be considered contract costs.
2. Cost to complete = $5,500,000
3. Percentage of completion
= 4,500,000/(4,500,000 + 5,500,000)
= 4,500,000/10,000,000
= 45%