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Recognition of construction contracts work in progress balances
Construction contracts work in progress should be
recognised from the date on which it becomes probable
that the contract will be obtained and thus economic
benefits will flow to the entity.
Costs incurred after that date in respect of the
contract should therefore be included in WIP.
Initial measurement of construction contracts work in progress balances
Initial measurement of construction contracts WIP
balances is at cost. Cost should include all costs
that relate directly to the specific contract, and
allocated overheads relating to construction contracts
generally . The allocation of overhead
costs should be performed on a systematic and consistent
basis [IAS11.18].
Other costs should be included in WIP if the contract
specifically allows for the recharge of such costs
[IAS11.16] . General overhead costs
and selling costs not specifically rechargeable
under the terms of the contract should not be included
in WIP [IAS11.19,20]. Costs relating to inefficiencies,
for example the depreciation cost of idle plant,
should also be excluded [IAS11.20(d)].
The attributable borrowing costs should be included
in the WIP balance if the entity follows a policy
of capitalising borrowing costs [IAS11.18].
Cost of variations and claims
A variation is a modification of the original construction
contract that may lead to an increase or decrease
in the amount of work (costs) and contract revenue.
Variations include changes in specification or design,
the method or manner of performance, facilities,
equipment, materials, site and period for completion
[IAS11.13]. Many variations are unpriced, with the
change agreed first and price adjustments negotiated
later.
A claim relates to additional amounts sought by
the contractor as compensation for cost overruns
[IAS11.14].
Costs a contractor incurs with respect to variations
and claims should be accounted for as contract costs
and included in work in progress; however, the costs
of the variations and claims should only be reflected
in contract revenue to the extent that the amounts
are expected to be recoverable [IAS11.33] .
A degree of scepticism should be used in
assessing the recoverability of such amounts.
Measurement subsequent to initial measurement
Subsequent to initial measurement, construction
contract WIP balances will be reduced by the amount
of contract cost transferred to contract expense
in the income statement. The amount transferred
will be determined by the stage of completion of
the construction contract [IAS11.7,22]. The amount
is calculated on a contract-by-contract basis subject
to the requirements to combine and segment contracts
.
The standard expresses the WIP balance in the following
terms [IAS11.43]:
"The gross amount due from customers for
contract work is the net amount of:
| a) |
costs incurred plus recognised
profits; less |
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| b) |
the sum of recognised losses and progress
billings |
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| c) |
for all contracts in progress for which
costs incurred plus recognised profits (less
recognised losses) exceeds progress billings." |
This amount is included in the balance sheet as
Construction contract WIP .
Where progress billings exceed costs incurred plus
recognised profits (less recognised losses), the
balance will be a net credit balance and represents
deferred revenue. This is included in liabilities
as amounts due to customers for contract work [IAS11.44].
The negative balance is not offset against positive
work in progress balances on other contracts.
Impairment losses
The entire loss should be recognised as an expense
immediately if at any stage a contractor expects
to incur a loss on completion of a construction
contract [IAS11.36]. The corresponding
credit should be allocated between the WIP balance
and a provision for the future loss expected to
be incurred. The allocation should be made in proportion
to the WIP balance and the future costs expected
to be incurred.
A loss is expected if estimated total contract
costs exceed estimated contract revenues [IAS11.36].
Total estimated contract costs should include all
costs, direct and allocated. Where a contract is
assessed as onerous, the present obligation of the
loss under the contract should be recognised and
measured as a provision [IAS37R.66].
Factors that should be considered in arriving at
the projected loss on a contract include target
penalties and incentives, non-reimbursable costs,
variations and claims. Discounting should be used
where this has a material impact on the impairment
assessment.
Presentation and disclosure
Balances arising from incomplete construction contracts
should be presented as follows:
| a) |
total of positive
WIP balances. Include in current assets within
a separate line item on the face of the balance
sheet. Represents amounts due from customers
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| b) |
total of negative WIP balances. Include
in current liabilities within trade and other
liabilities. Represents deferred revenue and
should be described as amounts due to customers; |
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| c) |
amounts invoiced to the customer,
but for which payment has not been received
at the balance sheet date. Include in trade
receivables. |
The other disclosures that should be given in respect
of construction contracts are as follows:
| a) |
contract revenue
recognised as revenue in the period [IAS11.39(a)];
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| b) |
contract costs incurred and recognised
profits (less recognised losses) to date [IAS11.40(a)]; |
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| c) |
advances received before work
is performed. Include within trade and other
payables [IAS11.40(b)]; |
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| d) |
retentions. Include within
current assets [IAS11.40(c)]; |
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| e) |
details of methods used to
determine contract revenue [IAS11.39(b)]; |
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| f) |
details of methods used to
determine stage of completion [IAS11.39(c)]. |
Retentions are the amounts of progress billings
that are not paid until conditions specified in
the contract have been met with respect to the satisfactory
construction of the asset [IAS11.41].
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