IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 8 / Construction Contracts (lAS I I)

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• It should be probable that a customer will approve variations. • Negotiations should be sufficiently advanced with respect to claims. • A contract should be at a sufficiently advanced stage to make it probable that incentive mile– stones will be achieved. 5. CONTRACT COSTS 5.1 Contract costs shall consist of (a) Costs that relate directly to the specific contract; (b) Costs that are attributable to contract activity in general and can be allocated to contracts ; and (c) Such other costs as are specifically chargeable under the terms of the contract. 5.2 Common examples of costs that are considered related directly to specific contracts are • Site labor costs, including site supervisions • Materials used in construction • Depreciation of machinery, plant , and equipment used in construction • Cost of hiring plant (if not owned by the contractor) • Cost of moving plant to and from contract site • Design and technical assistance costs directly related to the contract • Cost of rectification and guarantee work, including warranty costs • Claims from third parties These costs may be reduced by any incidental income resulting from sale of surplus material and the dispo sal of equipment at the end of the contract. 5.3 Costs that may be attributable to contract activity in general and can be allocated to specific contracts are insurance, construction overhead, and the like. General contract activity costs must be allocated on a systematic and rational basis assuming a "normal" level of construction activity. 5.4 Costs that may be specifically charged to the customer under the terms of the contract include percentage of general and administrative overheads or development costs that the customer has specifically agreed to reimburse under the terms of the contract. 5.5 Costs that cannot be attributed to contract activity or cannot be allocated to a contract are ex– cluded from costs of construction contract. Examples of such costs are • Selling and marketing costs • General and administrative costs for which the reimbursement is not specified in the contract • Research and development costs for which reimbursement is not specified in the contract • Depreciation on idle plant and equipment whose use cannot be attributable to any construc– tion contract 5.6 A matter of debate in this area is costs incurred in securing a contract, such as travel, promo– tion and meeting costs, and the like. Usually only those costs incurred after winning the contract are included as contract costs . However, the Standard states that if such "p recontract" costs are re– liably measurable and it is probable that the contract will be secured, then such costs are included as part of the overall contract cost. In practice, if the contract has been secured by the time the fi– nancial statements are authorized for issue, then the condition of probability of securing the con– tract is satisfied and the costs can be included. However, it should be noted that once such "pre– contract" costs have been expensed, they cannot be reinstated once the contract is secured. 6. RECOGNITION OF CONTRACT REVENUE AND EXPENSES 6.1 Contract revenue and contract costs should be recognized in the income statement when the outcome of the contract can be estimated reliably. 6.2 The revenue and costs should be recognized by reference to the stage of completion at the balance sheet date .