Accounting Standards 1-29 - Seth & Associates

Accounting Standard 7 (REVISED)
Construction Contracts
(In this Accounting Standard, the standard portions have been set in bold italic type.
These should be read in the context of the background material which has been set in
normal type, and in the context of the ‘Preface to the Statements of Accounting
Standards'.)
Accounting Standard (AS) 7, Construction Contracts (revised), issued by the Council of
the Institute of Chartered Accountants of India, comes into effect in respect of all
contracts entered into during accounting periods commencing on or after 1-4-2003 and is
mandatory in nature from that date. Accordingly, Accounting Standard (AS) 7,
‘Accounting for Construction Contracts’, issued by the Institute in December 1983, is not
applicable in respect of such contracts. Early application of this Standard is, however,
encouraged.
The following is the text of the revised Accounting Standard.
Objective
The objective of this Statement is to prescribe the accounting treatment of revenue and
costs associated with construction contracts. Because of the nature of the activity
undertaken in construction contracts, the date at which the contract activity is entered into
and the date when the activity is completed usually fall into different accounting periods.
Therefore, the primary issue in accounting for construction contracts is the allocation of
contract revenue and contract costs to the accounting periods in which construction work
is performed. This Statement uses the recognition criteria established in the Framework
for the Preparation and Presentation of Financial Statements to determine when contract
revenue and contract costs should be recognised as revenue and expenses in the statement
of profit and loss. It also provides practical guidance on the application of these criteria.
Scope
1. This Statement should be applied in accounting for construction contracts in the
financial statements of contractors.
Definitions
2. The following terms are used in this Statement with the meanings specified:
A construction contract is 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 and function or their ultimate purpose or use.
A fixed price contract is a construction contract in which the contractor agrees to a
fixed contract price, or a fixed rate per unit of output, which in some cases is
subject to cost escalation clauses.