Accounting for Construction Contracts AS 7

Objective
Accounting Treatment for Contract Revenue.
Allocation of Contract Cost.

Applicability of the Standard

Applies to the contracts of which start date and end date is falling in the different accounting periods.
Applies to Contractor for all contracts.
Except : The construction activity is undertaken on its own account as a commercial venture.
This Standard is not applicable to Builder.

Definitions
Construction Contract

is a contract specifically negotiated for the

construction of an asset or combination of assets
that are closely interrelated or interdependent
in terms of their design, technology and function
or their ultimate purpose or use
and includes contracts

rendering of services

cp

which are

destruction or restoration of
assets
and

directly related to construction

of an asset

restoration of environment
following demolition of asset

TYPES OF CONTRACT

Fixed Price Contract

is a construction contract in which
the contractor agrees to a
fixed contract price or fixed rate per unit of output, which
in some cases is subject to cost escalation

Cost plus Contract

is a construction contract in which
the contractor is reimbursed for allowable or otherwise defined costs,
plus percentage of these costs or a fixed rate

SEGMENTING AND COMBINING

SEGMENTING AND COMBINING
ONE CONTRACT

SINGLE ASSET

MANY CONTRACTS

MANY ASSETS

ADDITIONAL ASSET

Para 8 conditions
Group of contracts is
negotiated as a single
package and

SINGLE
CONTRACT

PARA 7 CONDITIONS
TO BE SATISFIED

PARA 9 CONDITIONS
TO BE SATISFIED

separate proposal has been

submitted for each asset

It differs significantly in design,

technology or function

Each contract is subject to

separate negotiation

and

Cost / revenue of each asset can

be identified

The contracts
are closely interrelated.
and
Contracts are
performed concurrently
or continuously

Price is negotiated
independently
SATISFIED

NOT
SATISFIED

SINGLE
CONTRACT

SEPARATE
CONTRACT

CONTRACT REVENUE:
initial amount of revenue

as agreed in the
contract

CONTRACT REVENUE
Other income
a) variation in contract work
b) claims
c) incentive payments

A variation is an instruction by the customer for a change in the scope of the work to be
performed under the contract.

A claim is an amount that the contractor seeks to collect from the customer or another party as
reimbursement for costs not included in the contract price.

Incentive payments are additional amounts payable to the contractor, if specified performance
standards are met or exceeded.

CONTRACT COST:
CONTRACT COST

DIRECT COST

ALLOCATED COST

SPECIFICALLY CHARGEABLE COST

AS PER THE TERMS OF CONTRACT

NOTE: COST NEITHER ATTRIBUTABLE NOR ALLOCATED TO THE CONTRACT ACTIVITY ( LIKE AOH , SOH , R&D
COST AND DEPRECIATION OF IDLE ASSETS) ARE EXCLUDED FROM CONTRACT COST

DIRECT COST INCLUDES

Site labor cost including site super-vision

Cost of material
Depreciation of Plant used in the contract
Transshipment cost of plant, equipment and materials to and from contract site
Cost of Hiring plant and machinery
Cost of design and technical assistance which are directly related to contract
Claims from third parties

ALLOCATED COST INCLUDES

Insurance
Cost of designs and specification not directly related to contract
Construction overheads
Portion of general administrative overhead chargeable to the contract as per agreement.
BUT EXCLUDES

o
o
o
o

General administration expenses not to be reimbursed by the customer

Selling Cost
Research and development costs reimbursement of which is not specified in the contract
Depreciation of idle plant and equipment.

SPECIFIC CHARGABLE COST INCLUDES

General administration cost

Development cost
Reimbursements specified in terms of contract

RECOGNITION OF EXPENSES OR LOSSES

EXPECTED LOSSES

RECOVERY OF COST
NOT POSSIBLE

INCOMES NOT
RECOVERABLE

TREATED AS EXPENSE

COST INCURRED IN
SECURING THE CONTRACT

RELIABLE ESTIMATIONS
Conditions for reliable estimate
In case of Fixed Price Contracts:

Total revenue can be measured reliably

Economic benefits will flow to the enterprise

Contract costs to complete and the stage of completion can be measured at the reporting date

Contract costs attributable to the contract can be identified and measured

In case of Cost Plus Contracts:

Economic benefits will flow to the enterprise

Contract costs attributable to the contract can be identified and measured

DETERMINATION OF STAGE OF COMPLETION

1. Stage of completion= Costs incurred up to reporting date
Total Estimated Costs
{Doesnt include payment made to the sub contractors in advance of work performed under the sub contract}
2. Surveys of work performed
3. Completion of physical proportion of contract work.

DISCLOSURE

Amount of Contract Revenue recognized

Method used to determine the contract revenue

Method used to determine the stage of completion

For contracts in progress, it should also disclose:

Aggregate amount of costs incurred and recognized profits

Amount of advances received

Amount of retentions

Gross amount due from and due to customers