Ias 11

IAS 11 global Accounting normal 11 pull Contracts In April 2001 the International Accounting Standards Board (IASB) adopted IAS 11 Construction Contracts, which had reli able-bodiedly been ventd by the International Accounting Standards Committee in December 1993. IAS 11 Construction Contracts replaced parts of IAS 11 Accounting for Construction Contracts (issued in March 1979). Other IFRSs claim made minor consequential amendments to IAS 11. They include IAS 23 acquire Costs (as revised in March 2007) and IAS 1 Presentation of Financial Statements (as revised in September 2007). IFRS theme A613 IAS 11 CONTENTS from paragraph world-wide ACCOUNTING STANDARD 11 CONSTRUCTION CONTRACTS OBJECTIVE SCOPE DEFINITIONS COMBINING AND SEGMENTING CONSTRUCTION CONTRACTS CONTRACT tax income CONTRACT COSTS RECOGNITION OF CONTRACT REVENUE AND EXPENSES RECOGNITION OF EXPECTED LOSSES CHANGES IN ESTIMATES DISCLOSURE EFFECTIVE DATE 1 3 7 11 16 22 36 38 39 46 FOR THE ACCOMPANYING DOCUMENTS LISTE D BELOW, SEE PART B OF THIS EDITION ILLUSTRATIVE EXAMPLES Disclosure of accounting policies The determination of focus taxation and disbursals Contract disclosures A614 IFRS Foundation IAS 11 International Accounting Standard 11 Construction Contracts (IAS 11) is set out in paragraphs 146. All the paragraphs have equal authority further retain the IASC format of the Standard when it was adopted by the IASB. IAS 11 should be read in the context of its objective, the Preface to International Financial Reporting Standards and the abstract frame perish for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. IFRS Foundation A615 IAS 11 International Accounting Standard 11 Construction Contracts Objective The objective of this Standard is to prescribe the accounting treatment of tax income and hails associated with plait obligations. Because of the nature of the exertion undertaken in manifestation cartels, the date at which the arrest activity is entered into and the date when the activity is completed usu in ally fall into different accounting periods.Therefore, the primary issue in accounting for aspect comes is the allocation of narrow down revenue and nonplus cost to the accounting periods in which construction overwork is performed. This Standard uses the recognition criteria establish in the Framework for the Preparation and Presentation of Financial Statements1 to determine when crush revenue and subscribe cost should be accepted as revenue and expenses in the statement of comprehensive income. It also provides practical guidance on the application of these criteria. Scope This Standard shall be applied in accounting for construction switch offs in the financial statements of affirmers. 2 This Standard supersedes IAS 11 Accounting for Construction Contracts approved in 1978. Definitions 3 The s ide by side(p) terms be used in this Standard with the meanings specified A construction contract is a contract particularizedally negotiated for the construction of an addition or a combination of pluss that atomic number 18 almost interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.A dogged bell contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per building block of output, which in some cases is subject to cost escalation clauses. A cost plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined be, plus a lot of these be or a fixed fee. 4 A construction contract may be negotiated for the construction of a single asset such as a bridge, building, dam, pipeline, road, ship or tunnel.A construction contract may also deal with the construction of a number of assets which be closely interrelated o r interdependent in terms of their design, technology and function or their ultimate purpose or use examples of such contracts include those for the construction of refineries and other complex pieces of plant or equipment. 1 IASCs Framework for the Preparation and Presentation of Financial Statements was adopted by the IASB in 2001.In September 2010 the IASB replaced the Framework with the Conceptual Framework for Financial Reporting. A616 IFRS Foundation IAS 11 5 For the purposes of this Standard, construction contracts include (a) contracts for the rendering of run which are straight related to the construction of the asset, for example, those for the services of project managers and architects and contracts for the destruction or restoration of assets, and the restoration of the environment following the demolition of assets. (b) 6Construction contracts are formulated in a number of ways which, for the purposes of this Standard, are classified as fixed price contracts and cos t plus contracts. Some construction contracts may contain characteristics of both a fixed price contract and a cost plus contract, for example in the case of a cost plus contract with an agreed maximum price. In such circumstances, a contractor needs to consider all the conditions in paragraphs 23 and 24 in order to determine when to recognise contract revenue and expenses.Combining and segmenting construction contracts 7 The requirements of this Standard are usually applied come apartly to each construction contract. However, in certain circumstances, it is necessary to apply the Standard to the one by one identifiable components of a single contract or to a concourse of contracts together in order to reflect the substance of a contract or a group of contracts.When a contract covers a number of assets, the construction of each asset shall be treated as a separate construction contract when (a) (b) separate proposals have been submitted for each asset each asset has been subject to separate negotiation and the contractor and node have been able to accept or scorn that part of the contract relating to each asset and the be and revenues of each asset discharge be identified. (c) 9 A group of contracts, whether with a single client or with several customers, shall be treated as a single construction contract when (a) (b) the group of contracts is negotiated as a single package the contracts are so closely interrelated that they are, in effect, part of a single project with an overall increase margin and the contracts are performed concurrently or in a continuous sequence. (c) 10A contract may provide for the construction of an special asset at the option of the customer or may be amend to include the construction of an additional asset. The construction of the additional asset shall be treated as a separate construction contract when (a) the asset differs importantly in design, technology or function from the asset or assets covered by the original contr act or the price of the asset is negotiated without regard to the original contract price. b) IFRS Foundation A617 IAS 11 Contract revenue 11 Contract revenue shall comprise (a) (b) the initial pith of revenue agreed in the contract and disagreements in contract work, claims and incentive payments (i) (ii) to the extent that it is equiprobable that they will result in revenue and they are capable of being reliably calculated. 12Contract revenue is measured at the fair value of the consideration received or receivable. The measurement of contract revenue is affected by a variety of uncertainties that depend on the case of future events. The estimates often need to be revised as events occur and uncertainties are resolved. Therefore, the make out of contract revenue may increase or decrease from one period to the next.For example (a) a contractor and a customer may agree variations or claims that increase or decrease contract revenue in a period subsequent to that in which the contract was initially agreed the issue forth of revenue agreed in a fixed price contract may increase as a result of cost escalation clauses the centre of contract revenue may decrease as a result of penalties arising from delays caused by the contractor in the apogee of the contract or when a fixed price contract involves a fixed price per unit of output, contract revenue increases as the number of units is increased. b) (c) (d) 13 A variation is an instruction by the customer for a change in the scope of the work to be performed under the contract. A variation may lead to an increase or a decrease in contract revenue. Examples of variations are changes in the specifications or design of the asset and changes in the duration of the contract. A variation is included in contract revenue when (a) (b) it is probable that the customer will approve the variation and the make sense of revenue arising from the variation and the amount of revenue rouse be reliably measured. 4 A claim is an amount that the contractor seeks to collect from the customer or another party as reimbursement for be not included in the contract price. A claim may arise from, for example, customer caused delays, errors in specifications or design, and disputed variations in contract work. The measurement of the amounts of revenue arising from claims is subject to a high level of uncertainty and often depends on the outcome of negotiations.Therefore, claims are included in contract revenue only when (a) (b) negotiations have reached an advanced dot such that it is probable that the customer will accept the claim and the amount that it is probable will be accepted by the customer can be measured reliably. A618 IFRS Foundation IAS 11 15 Incentive payments are additional amounts paid to the contractor if specified performance standards are met or exceeded. For example, a contract may allow for an incentive payment to the contractor for early bound of the contract.Incentive payments are i ncluded in contract revenue when (a) (b) the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded and the amount of the incentive payment can be measured reliably. Contract cost 16 Contract costs shall comprise (a) (b) costs that relate directly to the specific contract costs that are attributable to contract activity in general and can be allocated to the contract and such other costs as are specifically chargeable to the customer under the terms of the contract. c) 17 Costs that relate directly to a specific contract include (a) (b) (c) (d) (e) (f) (g) (h) station labour costs, including rate supervision costs of materials used in construction depreciation of plant and equipment used on the contract costs of moving plant, equipment and materials to and from the contract site costs of hiring plant and equipment costs of design and technical assistance that is directly related to the contract the estimated costs of rectification and guarantee work, including expected countenance costs and claims from third parties.These costs may be reduced by any incidental income that is not included in contract revenue, for example income from the barter of surplus materials and the disposal of plant and equipment at the end of the contract. 18 Costs that may be attributable to contract activity in general and can be allocated to specific contracts include (a) (b) (c) insurance costs of design and technical assistance that are not directly related to a specific contract and construction overheads. IFRS Foundation A619 IAS 11 Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of construction activity. Construction overheads include costs such as the preparation and processing of construction personnel payroll. Costs that may be attributable to contract activity in genera l and can be allocated to specific contracts also include espousal costs. 9 Costs that are specifically chargeable to the customer under the terms of the contract may include some general administration costs and development costs for which reimbursement is specified in the terms of the contract. Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract.Such costs include (a) (b) (c) (d) 21 general administration costs for which reimbursement is not specified in the contract selling costs research and development costs for which reimbursement is not specified in the contract and depreciation of idle plant and equipment that is not used on a particular contract. 20 Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final terminus of the contract.However, costs that relate directly to a contract and are incurred in securing the contract are also included as part of the contract costs if they can be separately identified and measured reliably and it is probable that the contract will be obtained. When costs incurred in securing a contract are treasure as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period.Recognition of contract revenue and expenses 22 When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be prize as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period. An expected red ink on the construction contract shall be recognised as an expense forthwith in accordance with paragraph 36.In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied (a) (b) rack up contract revenue can be measured reliably it is probable that the economic benefits associated with the contract will flow to the entity both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably and 23 (c) A620 IFRS Foundation IAS 11 (d) he contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with front estimates. 24 In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied (a) it is probable that the economic benefits associated with the contract will flow to the entity and the contract costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably. b) 25 The recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportionality of work completed. This method provides useful information on the extent of contract activity and performance during a period.Under the percentage of completion method, contract revenue is recognised as revenue in profit or liberation in the accounting periods in which the work is performed. Contract costs are usually recognised as an expense in profit or loss in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately in accordance with paragraph 36.A contractor may have incurred contract costs that relate to future activ ity on the contract. Such contract costs are recognised as an asset provided it is probable that they will be corned. Such costs represent an amount cod from the customer and are often classified as contract work in make headway. The outcome of a construction contract can only be estimated reliably when it is probable that the economic benefits associated with the contract will flow to the entity.However, when an uncertainty arises about the collectibility of an amount already included in contract revenue, and already recognised in profit or loss, the uncollectible amount or the amount in respect of which recovery has ceased to be probable is recognised as an expense rather than as an adjustment of the amount of contract revenue. An entity is generally able to make reliable estimates after it has agreed to a contract which establishes (a) (b) (c) each partys enforceable rights regarding the asset to be constructed the consideration to be exchange and the manner and terms of settl ement. 6 27 28 29 It is also usually necessary for the entity to have an effective internal financial budgeting and reporting system. The entity reviews and, when necessary, revises the estimates of contract revenue and contract costs as the contract progresses. The need for such revisions does not necessarily indicate that the outcome of the contract cannot be estimated reliably. IFRS Foundation A621 IAS 11 30 The stage of completion of a contract may be compulsive in a variety of ways. The entity uses the method that measures reliably the work performed.Depending on the nature of the contract, the methods may include (a) (b) (c) the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs surveys of work performed or completion of a physical proportion of the contract work. Progress payments and advances received from customers often do not reflect the work performed. 31 When the stage of completion is determined by reference to the contract costs incurred to date, only those contract costs that reflect work performed are included in costs incurred to date.Examples of contract costs which are excluded are (a) contract costs that relate to future activity on the contract, such as costs of materials that have been delivered to a contract site or set aside for use in a contract but not yet installed, used or applied during contract performance, unless the materials have been made specially for the contract and payments made to subcontractors in advance of work performed under the subcontract. (b) 32When the outcome of a construction contract cannot be estimated reliably (a) revenue shall be recognised only to the extent of contract costs incurred that it is probable will be recoverable and contract costs shall be recognised as an expense in the period in which they are incurred. (b) An expected loss on the construction contract shall be recognised as an expense immediately in accordance with paragraph 36. 3 3 During the early stages of a contract it is often the case that the outcome of the contract cannot be estimated reliably.Nevertheless, it may be probable that the entity will recover the contract costs incurred. Therefore, contract revenue is recognised only to the extent of costs incurred that are expected to be recoverable. As the outcome of the contract cannot be estimated reliably, no profit is recognised. However, even though the outcome of the contract cannot be estimated reliably, it may be probable that total contract costs will exceed total contract revenues.In such cases, any expected excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately in accordance with paragraph 36. Contract costs that are not probable of being recovered are recognised as an expense immediately. Examples of circumstances in which the recoverability of contract costs incurred may not be probable and in which contract costs may need to be re cognised as an expense immediately include contracts (a) that are not fully enforceable, ie their validity is seriously in question 34 A622 IFRS Foundation IAS 11 (b) (c) (d) (e) 5 the completion of which is subject to the outcome of pending litigation or legislation relating to properties that are likely to be condemned or expropriated where the customer is unable to meet its obligations or where the contractor is unable to complete the contract or otherwise meet its obligations under the contract. When the uncertainties that prevented the outcome of the contract being estimated reliably no longer exist, revenue and expenses associated with the construction contract shall be recognised in accordance with paragraph 22 rather than in accordance with paragraph 32.Recognition of expected losses 36 When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognised as an expense immediately. 37 The amount of such a loss is determined irrespective of (a) (b) (c) whether work has commenced on the contract the stage of completion of contract activity or the amount of profits expected to arise on other contracts which are not treated as a single construction contract in accordance with paragraph 9. Changes in estimates 8 The percentage of completion method is applied on a accumulative basis in each accounting period to the current estimates of contract revenue and contract costs. Therefore, the effect of a change in the estimate of contract revenue or contract costs, or the effect of a change in the estimate of the outcome of a contract, is accounted for as a change in accounting estimate (see IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors). The changed estimates are used in the determination of the amount of revenue and expenses recognised in profit or loss in the period in which the change is made and in subsequent periods.Disclosure 39 An entity shall disclose (a) (b) the amount of contract revenue recognised as revenue in the period the methods used to determine the contract revenue recognised in the period and the methods used to determine the stage of completion of contracts in progress. (c) IFRS Foundation A623 IAS 11 40 An entity shall disclose each of the following for contracts in progress at the end of the reporting period (a) the aggregate amount of costs incurred and recognised profits (less recognised losses) to date the amount of advances received and the amount of retentions. b) (c) 41 Retentions are amounts of progress billings that are not paid until the cheer of conditions specified in the contract for the payment of such amounts or until defects have been rectified. Progress billings are amounts billed for work performed on a contract whether or not they have been paid by the customer. Advances are amounts received by the contractor before the related work is performed. An entity shall present (a) (b) the gross amount due from customers for contract work as an asset and the gross amount due to customers for contract work as a liability. 2 43 The gross amount due from customers for contract work is the fire amount of (a) (b) costs incurred plus recognised profits less the sum of recognised losses and progress billings for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceeds progress billings. 44 The gross amount due to customers for contract work is the net amount of (a) (b) costs incurred plus recognised profits less the sum of recognised losses and progress billings or all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). 45 An entity discloses any contingent liabilities and contingent assets in accordance with IAS 37 Provisions, contingent upon(p) Liabilities and Contingent Assets. Contingent liabilities and contingent assets may arise from such items as warranty costs, claims, penalties or possibl e losses. Effective date 46 This Standard becomes operative for financial statements covering periods beginning on or after 1 January 1995. A624 IFRS Foundation