IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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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. 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. 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 Case Study 2 • The contracts have been negotiated as a single package. • The contracts are performed in a continuous sequence.