IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 8 / Construction COli tracts (l AS 11)

73

a] The aggre gate amount of cos ts incurred and recognized profits, le ss re cogni zed lo sse s, to date b] Advan ces received c] Retentions

(5) The g ross amount du e from cus tomers for contract work as an asset (6) The g ross amount du e to cu st omers for contract work as a liability

11.2 The gros s amount du e from cus to mers for contract work is the net amount of costs incurred plus recogni zed profits, less the sum of recognized losse s and progre ss billing s for contracts in pro gress for which costs incurred plus recogn ized pro fit s, less recognized losses ex ceeds progress b illings. 11.3 The g ross amount du e to cus to mers for contract work is th e net amount of costs incurred plus recognized profits, less the sum of recognized losse s and progress billing s for contracts in progress for which progress billings exc eed incurred plus recogn ized profit s, le ss recogni zed losse s . Facts In year I , Slow Build Inc. was invited to tender for the construction of a resident ial block and connec ted shopping arcade with common plaza and garden and play areas. Tenders were required to detail the cos ts of each element separately, but it was clear that only one contractor would win the entire contract due to the interre lated aspec ts of the development. Durin g year I , Slow Build Inc. management traveled to the United States to visit three possible des igners in order to obtain their preliminary design proposals, of which only one would be selected. The cost of the visit was $20 ,000 . Later in year I, having selected one designer, Slow Build Inc. retu rned to the United States to clarify design details and request construction of a scale model in order to make a pre– sentation of the tender to the ultimate customer. The cost of the seco nd trip was $ IS,OOO. During year 2, but before its year I financial statements were authorized for issue, Slow Build Inc. was notified that it had been awarded the contract. However, the contract was not signed until after the year I financial statements were issued . The co ntract was for a total price of $ 16 million, comprising $9 million for the residenti al block , $S mil– lion for the shopping arcade, and $2 million for the common plaza, garden, and play area . A mobiliza– tion advance of $ 1 million would be paid at the outset, $ 1 million was payable at the end of year 2, $S million at the end of year 3, and $8 million was payable at the end of year 4, at which point the devel– opment would be complete and $ 1 million was to be held back as a retention for one year. Slow Build Inc. initially estimated that the total cost of the project wou ld be $12 million, of which $7 million would be for the residential block, $4 million for the shopping arcade , and $ 1 million for the plaza, gardens , and play area. Included in this cost is $ 1 million of plant acquired specific ally for the project that could not be used subsequently. The estimated residual val ue of this plant at the end of the cont ract was $ 100,000. Also includ ed in the ove rall cost was 30 months of depr eciat ion on general plant and equ ipment already owned by Slow Build Inc. at $SO ,OOO per month. Th e on-site accounts staff cost included in the estimate was $S,OOO per month. Their role was to maintain and record time cards of Case Study 4

workers and receive and issue materials. Costs incurred at each year-e nd were

Year 3 $3,000,000 1.800,000 200000 $5,000,000

Year 4 $3,000,000 1,700,000 800000 $5,500,000

Year 2 $1,000,000 500,000

Total $7,000,000 4,000,000 1000 000 $ 12,000,000

Residential block Shopping arcade Plaza, gardens, & play area Total

$1,500,000

The cost s at the end of year 2 include $2S0,000 of materials delivered to the site for use in year 3. The $200,000 in year 3 for the plaza, gardens, and play area was an advance to subcontractors who would mobilize in year 4. Durin g year 3, due to a fire at the neighboring plot, the police co rdoned off the whole area for a month while investigations were conducted. During this time all plant and equ ipment remained idle on site. However, work continued in Slow Build Inc.' s workshop and yard. During year 3, the customer requested a variation in the contract with a value of $ 1 million and a cost of $7S0,000. However, the variation was not approved by the customer until after Slow Build Inc.' s yea r 3

Made with