IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

71

Chapter 8 / Construction COl/tracts (lAS 11)

500,000 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 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. 1 000 000 S5 500000 S5,500 000 S I,OOO,OOO 3.000,000 Total contract cost estimated to complete Site labor cost Material cost Depreciation of special plant and equipment