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Wiley IFRS: Practical Implementation Guide and Workbook
quest furnish details of the contract costs incurred to date by component. After submission of the
separate proposals, it was agreed that the split of the contract price of $ 100,000 would be in the ratio of
70% for construction of the new bridge and 30% for demolishing the existing bridge.
Required
Evaluate in light of the provisions of lAS 11 whether the contract for the construction of the new bridge
and the contract for demolishing the existing bridge should be segmented and treated as separate con–
tracts or be combined and treated as a single contract.
Solution
The two contracts should be
segmented
and treated as
separate contracts
because
• Separate proposals were submitted for the two contracts.
• The two contracts were negotiated separately.
• Costs and revenues of each contract can be identified separately.
3.2
Combining Contracts
3.2.1
A group of contracts, each with a single or even with different customers, shall be treated as
a
single contrac t
when
( I ) The group of contracts is negotiated as one single package;
(2) The contracts are so closely interrelated that they are effectively (Le.,
in substance)
part of
one project with one overall profit margin;
and
(3) The contracts are performed either concurrently or in continuous sequence.
Case Study 2
Facts
Universal Builders Inc. is well known for its expertise in building flyovers and maintaining these struc–
tures. Impressed with Universal' s track record, the local municipal authorities have invited them to sub–
mit a tender for a two-year contract to build a super flyover in the heart of the city (the largest in the re–
gion) and another tender for maintenance of the flyover for 10 years after completion of the construction.
Required
Evaluate whether these two contracts should be segmented or combined into one contract for the pur–
poses of lAS 11.
Solution
The two contracts should be
combined
and treated as a
single
contract
because
• The two contracts are very closely related to each other and, in fact, are part of a single contract
with an overall profit margin.
• The contracts have been negotiated as a single package.
• The contracts are performed in a continuous sequence.
3.2.2
Sometimes a contract may provide for the construction of an additional asset at the option
of the cu stomer or may be amended to include the construction of an additional asset. Under such
circumstances, the additional asset sha ll be treated as a separate contract when it differs signifi–
cantly from the asset(s) covered by the original contract
or
when the price is negotiated without
reg ard to the original contract price.
4. CONTRACT REVENUE
Contract rev enue
shall comprise the
initial price agreed
in the contract together with
variation s.
claims. and incentives
to the extent that it is probable that they will result in revenue
and
they are
capable of being
reliably measured .
4.1
Variations, Claims, and Incentives
Over time, the contract value may need to be amended either upward or downward , There can be a
significant degree of uncertainty and, therefore , estimation in asse ssing the contract value and
hence revenu e to be recognized in fin ancial statements. In all cases, the amount must be
reliably
measurable
and
realization is probable.
For example