Contract Accounts IAS 11: Accounting treatment and disclosure

Contract accounts IAS 11,accounting treatment of contract accounts and disclosure of contract accounts

Contract Accounts

IAS 11 Construction Contracts describe allocation of contracting revenue and contract costing requirements for the accounting periods during which the work is performed. Contract revenue and contract expenses are recognized by reference to the stage of completion of the contract work where the effect of the construction contract can be reliably estimated, otherwise the revenue is recognized only to the extend of contractual costs are incurred.

Purpose of IAS 11

The purpose of IAS 11 is to provide for the accounting treatment to contract revenue and contract expenses  related to construction contracts.

What is a construction contract?

A construction contract is a negotiated contract for the formation of an asset or group of joint assets.

Under IAS 11, if a contract involves two or more assets, the calculation of each asset should be accounted for separately if

• different proposals are made for each asset, 
• the contract components  which is related to each asset negotiated separately. 
• the costs and benefits of each asset can be estimated.Otherwise, the contract should be completely calculated.

Two or more contracts should be counted as one agreement if they were negotiated together and the work is interrelated.

If the contract gives the option to order one or more additional assets, the formation of each additional asset should be accounted for as a separate contract if 

• the additional asset is different from the original asset or 
• price of the additional asset is negotiated separately.

What is included in contract fees and expenses?

Contract revenue should include the amount agreed to in the original contract, as well as income from the alteration of the original contract work, claims and incentive payments

• are expected to be collected and 
• can be estimated reliably.

Contract costs should include costs directly related to the specific contract, as well as the costs incurred by the contractor's work to the point of contract, as well as other costs that may be charged directly to the buyer under the terms of the contract.

Accounting treatment of contract accounts

If the outcome of a construction contract can be reliably estimated, the revenue and expenses should be recognized based on the phase of completion of the contract work. This method is called percentage of completion method of Accounting.

To be able to measure the outcome of a contract reliably, an entity must be able to estimate the reliability of the total contract amount, the stage of completion, and the cost of completing the contract.

If the result can be measured reliably, no benefit should be observed. Instead, contract revenue should only be recognized when the contract costs incurred are expected to be recoverable and contract costs should be defined as incurred.

The stage of contract termination is determined in various ways - including the estimated cost of the contract charged by the contractor to date, the survey of the work performed, or completion of a physical proportion of the contractual work. completion of a physical proportion of the contract workcompletion of a physical proportion of the contract work ompletion of a physical proportion of the contract work.

The expected loss on a construction contract should be recognized as an expense as soon as such loss is incurred.

Disclosure of contract accounts

• the amount of contract revenue recognized.
• the method used to determine revenue.
• methods used to determine the phase of completion
• ongoing contracts on balance sheet date.
• costs incurred with recognized profit
• advance payments.
• retention amount.

Presentation

The total amount due from the customer's contractual work should be shown as an asset.

The total amount due to the contractor's customer service should be shown as a liability.