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Chapter
8 /
Construction COl/tracts (lAS
11)
71
500,000
1 000 000
S5 500000
S5,500 000
S I,OOO,OOO
3.000,000
Total contract cost estimated
to
complete
The company has signed a fixed price contract of $12,000,000 for the construction of this prestigious
tower.
The details of the costs incurred to date in the first year are
Site labor costs
Cost of construction material
Depreciation of special plant and equipment used in
contracting to build the tallest building
Marketing and selling costs to get the tallest building
in the country the right exposure
Total
Required
Calculate the percentage of completion and the amounts of revenue, costs, and profits to be recognized
under lAS
II .
Solution
(a) Contract cost incurred to date
Site labor cost
Material cost
Depreciation of special plant and equipment
SI,OOO,OOO
3,000,000
500000
S4 500 000
NOTE: lAS
11
does not allow "market ing and selling costs" to be considered contract costs.
(b) Cost to complete
S5 500 000
(c) Percentage of completion
4,500,000
I
(4,500,000
+
5,500,000)
4,500,000 I
10,000,000
45%
(d) Revenue, costs, and profits to be recognized in the first year:
Revenue
12,000,000 x 0,45
=
S5,400,000
Costs
10.000,000 x 0,45
=
S4 500 000
Profit
S900 000
9.5 In all cas es, care must be taken in estimating percentage complete to exclude costs that relate
to
future
acti vity ,
such as materials delivered to site. Such cost s are recog nized as an asset, pro–
vided it is probable that they will be recovered . Such costs repre sent amounts incurred on behalf of
the customer and are thus amo unts due from a customer. These costs are often classified as "con–
tract work in progress."
Practical Insight
In order to take adva ntage of bulk or volume discou nts on purc hase of con structio n materials,
such as steel or cement, contractors sometimes buy significant quantitie s of those items and
stock them at a site where a big construct ion contract is in progress, The costs of such materi–
als are future cos ts because these are not meant for immed iate consumption at the site where
they are stored. Such costs qualify for the treatment explained above in case of future cos ts. At
year-end they may need to be estimated in order to report them on the balance shee t as "con–
tract work in progress."
9.6 It should be borne in mind that the billing schedule, and eve n the realization of interim in–
voices for such adva nce deli veries, need not bear any relation to the level of reve nue that should be
recog nized in the income statement. Similarly, invoices received from, and payments made to, sub–
con tractors in adva nce of the work actually being performed also need to be excluded .
9.7 A more reliable method is the indepe ndent ce rtification or survey of the value of work done
as of the balance sheet date and then ensuring that all costs relating to such work have been fully
recognized.