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CONSTRUCTION CONTRACTS (lAS 11)
1. BACKGROUND AND INTRODUCTION
1.1
This objective of lAS
II ,
Construction Contra cts,
is to prescribe the criteria for the account–
ing of revenue and costs in relation to construction contracts. Due to the nature of such contracts–
the commencement and completion dates are usually well separated, often crossing accounting pe–
riod ends-the Standard focuses on the allocation of revenue and costs to those accounting periods
in which the construction contract is executed.
1.2 The Standard shall be applied in accounting for construction contracts in the financial state–
ments of
contra ctors.
Construction contracts also include contracts for services that are directly
related to the constru ction of an asset, such as project management or design.
2.
DEFINITIONS OF KEY TERMS (in accordance with lAS
11)
Construction contract. A contract specifically negotiated for the con struction of an asset or
combination of assets that are closely interrelated or interdependent in terms of their design ,
technology, function, or ultimate use or purpose.
Fixed price contract. A construction contract in which the contractor agrees to a fixed price.
Cost-plus contract. A construction contract in which the contractor is reimbursed for allow–
able or defined costs plus a percentage of such costs or a fixed fee.
Variation. An instruction by the customer for the change in the scope of the work to be per–
formed in the contract.
Claim. An amount that the contract seeks to collect from a customer or another party as reim–
bursement for costs not included in the contract price .
Incentive payments. Additional amounts paid to the contractor if specified performance stan–
dards are met or exceeded .
3.
COMBINING AND SEGMENTING CONSTRUCTION CONTRACTS
The provisions of this Standard usually are applied to construction contracts separately. Some–
times , however, it is necessary to the Standard to separate parts of one contract or to consider a
group of contracts as one. The purpose is to properly reflect the substance of the transaction rather
than the legal form.
3.1
Segmenting Contracts
When a contract covers the construction of a number of assets, the contract for construction of each
asset shall be considered a separate contract when
(a) Separate proposals have been submitted for each asset ;
(b) Each asset has been subject to separate negotiation and both contractor and customer were
able to accept or reject that part of the contract relating to each asset;
and
(c) The costs and revenues of each asset are separately identifiable.
Case Study 1
Facts
XYZ, Inc. is negotiating with the local government to build a new bridge after demolishing the existing
bridge in downtown near the city center. At the initial meeting, it was indicated that the government
would not be willing to pay for both components of the contract an amount exceeding
$100,000.
The
government representatives insisted that separate proposals would need to be submitted and negotiated
and that the contractor should maintain separate records for each component of the contract and upon re-