International Financial Reporting Standards_guide.pdf

Chapter 24 Construction Contracts (IAS 11) 267
24.4.11 The principles of IAS 11 are normally applied separately to each contract negotiated
specifically for the construction of:
■ an asset (for example, a bridge); or
■ a combination of assets that are closely interrelated or interdependent in terms of their
design, technology, function, or use (for example, specialized production plants).
24.4.12 A group of contracts should be treated as a single construction contract if it was
negotiated as a single package.
24.4.13 The following contracts should be treated as separate construction contracts:
■ a contract for a number of assets if separate proposals have been submitted for each
asset; and
■ an additional asset constructed at the option of the customer that was not part of the
original contract.
24.4.14 The IFRIC issued IFRIC 15 in July of 2008, which clarifies how companies that construct
real estate should recognize their revenue and expenses in terms of this standard or in
terms of IAS 18 (chapter 23). If the contract is for the sale of goods, apply IAS 18; if it is for the
construction of real estate, apply IAS 11. The main expected change in practice is a shift for
some entities from recognizing revenue using the percentage-of-completion method (that is,
as construction progresses, with reference to the stage of completion of the development) to
recognizing revenue at a single point in time (that is, at completion upon or after delivery).
24.5 PRESENTATION AND DISCLOSURE
24.5.1 The Statement of Financial Position and notes include:
■ amount of advances received;
■ amount of retention monies;
■ contracts in progress being costs-to-date-plus-profits or costs-to-date-less-losses;
■ gross amount due from customers (assets);
■ gross amount due to customers (liabilities); and
■ contingent assets and contingent liabilities (for example claims).
24.5.2 The Statement of Comprehensive Income includes:
■ amount of contract revenue recognized.
24.5.3 Accounting policies include:
■ methods used for revenue recognition; and
■ methods used for stage of completion.
24.6 FINANCIAL ANALYSIS AND INTERPRETATION
24.6.1 The use of the percentage-of-completion method requires that the total cost and
total profit of a project be estimated at each reporting date. A pro rata proportion of the total
estimated profit is then recognized in each accounting period during the performance of the
contract. The pro rata proportion is based on the stage of completion at the end of the reporting
period and reflects the work performed during the period from an engineering perspective.
(Production is the critical event that gives rise to income.)