IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Wiley IFRS: Practical Implementation Guide and Workbook

6.3 When it is likely that contract costs will exceed contract revenue, then the entire

loss

must be

recognized in the income statement immediately, regardless of the stage of completion.

6.4 The percentage of completion of a contract at any balance sheet date is estimated on a cumu–

lative basis . Therefore,

changes in estimates

are automatically accounted for in the period in which

the change occurs and in future periods, which is in accordance with lAS 8,

Accounting Policies,

Changes in Accounting Estimates and Errors.

7. FIXED COST CONTRACT

With respect to a fixed price contract, the outcome can be estimated reliably when

• Total contract revenue can be measured reliably;

• It is probable that the economic benefit of the contract will flow to the entity;

• Both the costs to complete the contract and the stage of completion can be reliably estimated:

and

• The cost s attributable to the contract can be clearly identi fied and measured.

8. COST-PLUS CONTRACT

With respect to a cost-plus contract, the outcome can be reliably estimated when

• It is probable that the economic benefit of the contract will flow to the entity;

and

• The cost s attributable to the contract, whether specifically reimbursable or not, can be clearly

identified and measured .

9. PERCENTAGE OF COMPLETION METHOD

9.1

The recognition of revenues and expenses by references to the stages of completion of a con–

trac t is referred to as the

percentage of completion method .

The manner in which this method

works is simple: The contract revenues are matched with the contract costs incurred in reaching the

stage of completion. Such comparison results in the reporting of revenue, expenses, and profit that

can be attributed to the proportion of the work completed.

9.2 lAS II recogni zes only the percentage of completion method of recognition of revenues and

expenses. The "completed contract method" whereby no contract revenues or profits are recog–

nized until the contracts are completed or are substantially complete is not permitted under lAS

11.

9.3

The

stage of completion

of a contract can be estimated by a variety of means . Depending on

the nature of the contract, an entity may employ the method that measure s reliably the work per–

formed. These include

• The proportion that costs incurred at the balance sheet date bear to expected total costs re–

quired to complete the contract;

• Certification or surveys of work performed;

• Completion of physical proportion of the contract work .

9.4 Very often, and as a matter of prudence, unless a contract is sufficiently far advanced ,

revenue is recogni zed only to the extent of cost s incurred (i.e., zero profit is recognized). How far

is "sufficiently far advan ced" is a matter of judgment. Many entit ies state that a contract should be

at least 50% complete; othe rs, 75%; some, much lower percentages. Clearly hind sight can be very

beneficial. If the contract is complete by the time the financial statements are authori zed for issue,

it is a much simpler task to estimate the actual stage of completion at the balance sheet date. For

other cases, a robust estimating system with a proven track record of no significant inaccuracies is

a must if an entity wishes to reliably estimate final outcome when the percentage compl ete is low at

the time of est imation.

Case Study 3

Facts

Miracle Construct Inc. is executing a gigantic project of constructing the tallest building in the country.

The project is expected to take three years to complete.