Ias 11

IAS 11 worldwide news report trite 11 edifice burns In April 2001 the foreign be patterns Board (IASB) adopted IAS 11 Construction Contracts, which had origin all(prenominal)y been issued by the International chronicle old-hats Committee in December 1993. IAS 11 Construction Contracts replaced move of IAS 11 Accounting for Construction Contracts (issued in March 1979). Other IFRSs pee-pee do minor consequential amendments to IAS 11. They accept IAS 23 Borrowing exist (as revise in March 2007) and IAS 1 foundation of monetary Statements (as revised in September 2007). IFRS innovation A613 IAS 11 CONTENTS from paragraph world(prenominal) ACCOUNTING STANDARD 11 CONSTRUCTION crushS OBJECTIVE SCOPE DEFINITIONS compounding AND SEGMENTING CONSTRUCTION CONTRACTS CONTRACT REVENUE CONTRACT COSTS RECOGNITION OF CONTRACT REVENUE AND EXPENSES RECOGNITION OF EXPECTED LOSSES CHANGES IN ESTIMATES DISCLOSURE strong DATE 1 3 7 11 16 22 36 38 39 46 FOR THE ACCOMPANYING DOCUMENTS L ISTED BELOW, SEE touch off B OF THIS EDITION ILLUSTRATIVE EXAMPLES Disclosure of chronicle policies The determination of go tax income and put downs Contract disclosures A614 IFRS universe IAS 11 International Accounting beat 11 Construction Contracts (IAS 11) is set out in paragraphs 146. all in all the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 11 should be read in the scope of its objective, the Preface to International fiscal Reporting Standards and the conceptual Frame break for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a bum for selecting and applying accounting policies in the absence of explicit guidance. IFRS Foundation A615 IAS 11 International Accounting Standard 11 Construction Contracts Objective The objective of this Standard is to impose the accounting treatment of gross and comprise associated with edifice cut downs. Because of the nature of the use undertaken in device removes, the involution at which the slim down action is entered into and the date when the natural action is completed unremarkably fall into different accounting compass points.Therefore, the master(a) issue in accounting for twist stimulates is the allocation of twinge revenue and mystify cost to the accounting geological bounds in which pull work is performed. This Standard uses the recognition criteria established in the Framework for the Preparation and Presentation of Financial Statements1 to determine when scram revenue and sire cost should be value as revenue and be in the statement of comprehensive income. It also provides possible guidance on the application of these criteria. Scope This Standard shall be utilise in accounting for grammatical twisting brings in the financial statements of studyors. 2 This Standard supersedes IAS 11 Accounting for Construction Contracts approved in 1978. Definitions 3 The sp atomic number 18-time activeness harm atomic number 18 used in this Standard with the meanings stipulate A anatomical structure prune is a sheer specifically negotiated for the twirl of an addition or a combination of assets that atomic number 18 closely interrelated or dependent in terms of their design, technology and function or their eventual(prenominal) drive or use.A resolved set castrate is a locution obligation in which the contractor scoffs to a improve contract toll, or a fixed rate per unit of output, which in some cases is topic to cost escalation clauses. A cost positive contract is a braid contract in which the contractor is reimbursed for allowable or otherwisewise defined be, confirming a theatrical role of these cost or a fixed fee. 4 A tress contract whitethorn be negotiated for the braid of a single asset such(prenominal) as a bridge, building, dam, pipeline, road, transmit or tunnel.A construction contract whitethorn also de al with the construction of a number of assets which ar closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use examples of such contracts implicate those for the construction of refineries and other mingled pieces of plant or equipment. 1 IASCs Framework for the Preparation and Presentation of Financial Statements was adopted by the IASB in 2001.In September 2010 the IASB replaced the Framework with the Conceptual Framework for Financial Reporting. A616 IFRS Foundation IAS 11 5 For the purposes of this Standard, construction contracts hold (a) contracts for the rendering of function which argon directly related to the construction of the asset, for example, those for the services of project managers and architects and contracts for the destruction or restoration of assets, and the restoration of the environment sideline the demolition of assets. (b) 6Construction contracts are formulated in a number of slipw ay which, for the purposes of this Standard, are classified as fixed price contracts and cost positive contracts. Some construction contracts may contain characteristics of both a fixed price contract and a cost plus contract, for example in the case of a cost plus contract with an concord maximal price. In such circumstances, a contractor wants to consider all the conditions in paragraphs 23 and 24 in order to determine when to blot contract revenue and expenses.Combining and segmenting construction contracts 7 The requirements of this Standard are comm besides applied distractly to to each one construction contract. However, in certain circumstances, it is inevitable to apply the Standard to the take awayly identifiable components of a single contract or to a group of contracts together in order to excogitate the substance of a contract or a group of contracts.When a contract c everyplaces a number of assets, the construction of each asset shall be treated as a separate construction contract when (a) (b) separate proposals have been submitted for each asset each asset has been subject to separate negotiation and the contractor and client have been able to accept or reject that part of the contract relating to each asset and the cost and revenues of each asset flowingerpot be identify. (c) 9 A group of contracts, whether with a single customer or with several customers, shall be treated as a single construction contract when (a) (b) the group of contracts is negotiated as a single package the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit gross profit and the contracts are performed concurrently or in a continuous sequence. (c) 10A contract may provide for the construction of an additional asset at the survival of the customer or may be amended to embarrass the construction of an additional asset. The construction of the additional asset shall be treated as a separate constructi on contract when (a) the asset differs signifi faecestly in design, technology or function from the asset or assets covered by the maestro contract or the price of the asset is negotiated without regard to the original contract price. b) IFRS Foundation A617 IAS 11 Contract revenue 11 Contract revenue shall comprise (a) (b) the initial tote up of revenue agreed in the contract and divergences in contract work, calls and incentive defrayals (i) (ii) to the extent that it is presumptive that they go away result in revenue and they are capable of being faithfully deliberate. 12Contract revenue is measured at the fair value of the friendship trustworthy or receivable. The measurement of contract revenue is affected by a variety of uncertainties that depend on the gist of future events. The estimates a lot regard to be revised as events occur and uncertainties are resolved. Therefore, the hail of contract revenue may increase or decrease from one period to the next.For example (a) a contractor and a customer may agree variations or claims that increase or decrease contract revenue in a period subsequent to that in which the contract was initially agreed the essence of revenue agreed in a fixed price contract may increase as a result of cost escalation clauses the totality of contract revenue may decrease as a result of penalties arising from delays caused by the contractor in the bound of the contract or when a fixed price contract involves a fixed price per unit of output, contract revenue increases as the number of units is increased. b) (c) (d) 13 A variation is an instruction by the customer for a compound in the scope of the work to be performed under the contract. A variation may lead to an increase or a decrease in contract revenue. Examples of variations are changes in the specifications or design of the asset and changes in the duration of the contract. A variation is include in contract revenue when (a) (b) it is seeming that the c ustomer will approve the variation and the bill of revenue arising from the variation and the amount of revenue idler be dependably measured. 4 A claim is an amount that the contractor seeks to collect from the customer or some other party as reimbursement for cost non included in the contract price. A claim may arise from, for example, customer caused delays, errors in specifications or design, and disputed variations in contract work. The measurement of the amounts of revenue arising from claims is subject to a high level of uncertainty and often depends on the aftermath of negotiations.Therefore, claims are included in contract revenue only when (a) (b) negotiations have reached an groundbreaking level such that it is probable that the customer will accept the claim and the amount that it is probable will be accepted by the customer can be measured reliably. A618 IFRS Foundation IAS 11 15 motivator payments are additional amounts paid to the contractor if specified func tioning standards are met or exceeded. For example, a contract may allow for an incentive payment to the contractor for early completion of the contract.Incentive payments are included in contract revenue when (a) (b) the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded and the amount of the incentive payment can be measured reliably. Contract costs 16 Contract costs shall comprise (a) (b) costs that relate directly to the specific contract costs that are attributable to contract activity in habitual and can be allocated to the contract and such other costs as are specifically chargeable to the customer under the terms of the contract. c) 17 be that relate directly to a specific contract include (a) (b) (c) (d) (e) (f) (g) (h) send labour costs, including site supervision costs of materials used in construction depreciation of plant and equipment used on the contract costs of lamentable plant, equipment and ma terials to and from the contract site costs of hiring plant and equipment costs of design and adept assistance that is directly related to the contract the estimated costs of rectification and see to it work, including evaluate warranty costs and claims from third parties.These costs may be reduced by any incidental income that is non included in contract revenue, for example income from the sale of surplus materials and the disposal of plant and equipment at the end of the contract. 18 Costs that may be attributable to contract activity in general and can be allocated to specific contracts include (a) (b) (c) insurance costs of design and technical assistance that are non directly related to a specific contract and construction overheads. IFRS Foundation A619 IAS 11 Such costs are allocated using methods that are self-opinionated and rational and are applied consistently to all costs having convertible characteristics. The allocation is based on the normal level of construct ion activity. Construction overheads include costs such as the preparation and processing of construction personnel payroll. Costs that may be attributable to contract activity in general and can be allocated to specific contracts also include borrowing costs. 9 Costs that are specifically chargeable to the customer under the terms of the contract may include some general administration costs and development costs for which reimbursement is specified in the terms of the contract. Costs that can non be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract.Such costs include (a) (b) (c) (d) 21 general administration costs for which reimbursement is not specified in the contract selling costs research and development costs for which reimbursement is not specified in the contract and depreciation of idle plant and equipment that is not used on a particular contract. 20 Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract.However, costs that relate directly to a contract and are incurred in securing the contract are also included as part of the contract costs if they can be severally identified and measured reliably and it is probable that the contract will be obtained. When costs incurred in securing a contract are prize as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period.Recognition of contract revenue and expenses 22 When the end of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be accepted as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period. An expected injustice on the construction contract shall be treasure as an expens e immediately in ossification with paragraph 36.In the case of a fixed price contract, the end point of a construction contract can be estimated reliably when all the interest conditions are satisfied (a) (b) amount of money contract revenue can be measured reliably it is probable that the economical benefits associated with the contract will flow to the entity both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably and 23 (c) A620 IFRS Foundation IAS 11 (d) he contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates. 24 In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied (a) it is probable that the economic benefits associated with the contract will flow to the entity and the contra ct costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably. b) 25 The recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage of completion method. low this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. This method provides useful information on the extent of contract activity and performance during a period.Under the percentage of completion method, contract revenue is value as revenue in profit or loss in the accounting periods in which the work is performed. Contract costs are usually recognized as an expense in profit or loss in the accounting periods in which the work to which they relate is performed. However, any expected excess of heart contract costs ov er total contract revenue for the contract is recognize as an expense immediately in accordance with paragraph 36.A contractor may have incurred contract costs that relate to future activity on the contract. Such contract costs are recognised as an asset provided it is probable that they will be recovered. Such costs represent an amount due from the customer and are often classified as contract work in cash advance. The outcome of a construction contract can only be estimated reliably when it is probable that the economic benefits associated with the contract will flow to the entity.However, when an uncertainty arises well-nigh the collectibility of an amount already included in contract revenue, and already recognised in profit or loss, the uncollectible amount or the amount in respect of which recovery has ceased to be probable is recognised as an expense rather than as an adjustment of the amount of contract revenue. An entity is primarily able to make reliable estimates after it has agreed to a contract which establishes (a) (b) (c) each partys enforceable rights regarding the asset to be constructed the consideration to be exchanged and the manner and terms of settlement. 6 27 28 29 It is also usually necessary for the entity to have an effective home(a) financial budgeting and reporting system. The entity reviews and, when necessary, revises the estimates of contract revenue and contract costs as the contract progresses. The need for such revisions does not necessarily indicate that the outcome of the contract cannot be estimated reliably. IFRS Foundation A621 IAS 11 30 The stage of completion of a contract may be pertinacious in a variety of ways. The entity uses the method that measures reliably the work performed.Depending on the nature of the contract, the methods may include (a) (b) (c) the proportion that contract costs incurred for work performed to date hold up to the estimated total contract costs surveys of work performed or completion o f a physical proportion of the contract work. appear payments and advances received from customers often do not reflect the work performed. 31 When the stage of completion is determined by reference to the contract costs incurred to date, only those contract costs that reflect work performed are included in costs incurred to date.Examples of contract costs which are excluded are (a) contract costs that relate to future activity on the contract, such as costs of materials that have been delivered to a contract site or set aside for use in a contract but not yet installed, used or applied during contract performance, unless the materials have been made specially for the contract and payments made to subcontractors in advance of work performed under the subcontract. (b) 32When the outcome of a construction contract cannot be estimated reliably (a) revenue shall be recognised only to the extent of contract costs incurred that it is probable will be retrievable and contract costs shall be recognised as an expense in the period in which they are incurred. (b) An expected loss on the construction contract shall be recognised as an expense immediately in accordance with paragraph 36. 33 During the early stages of a contract it is often the case that the outcome of the contract cannot be estimated reliably.Nevertheless, it may be probable that the entity will recover the contract costs incurred. Therefore, contract revenue is recognised only to the extent of costs incurred that are expected to be recoverable. As the outcome of the contract cannot be estimated reliably, no profit is recognised. However, even though the outcome of the contract cannot be estimated reliably, it may be probable that total contract costs will exceed total contract revenues.In such cases, any expected excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately in accordance with paragraph 36. Contract costs that are not probable of bei ng recovered are recognised as an expense immediately. Examples of circumstances in which the recoverability of contract costs incurred may not be probable and in which contract costs may need to be recognised as an expense immediately include contracts (a) that are not fully enforceable, ie their validity is seriously in point 34 A622 IFRS Foundation IAS 11 (b) (c) (d) (e) 5 the completion of which is subject to the outcome of pending litigation or legislation relating to properties that are likely to be condemned or expropriated where the customer is futile to meet its obligations or where the contractor is unable to complete the contract or otherwise meet its obligations under the contract. When the uncertainties that prevented the outcome of the contract being estimated reliably no longer exist, revenue and expenses associated with the construction contract shall be recognised in accordance with paragraph 22 rather than in accordance with paragraph 32.Recognition of expected losses 36 When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognised as an expense immediately. 37 The amount of such a loss is determined disregardless of (a) (b) (c) whether work has commenced on the contract the stage of completion of contract activity or the amount of profits expected to arise on other contracts which are not treated as a single construction contract in accordance with paragraph 9. Changes in estimates 8 The percentage of completion method is applied on a cumulative basis in each accounting period to the current estimates of contract revenue and contract costs. Therefore, the effect of a change in the estimate of contract revenue or contract costs, or the effect of a change in the estimate of the outcome of a contract, is accounted for as a change in accounting estimate (see IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors). The changed estimates are used in the determination of t he amount of revenue and expenses recognised in profit or loss in the period in which the change is made and in subsequent periods.Disclosure 39 An entity shall disclose (a) (b) the amount of contract revenue recognised as revenue in the period the methods used to determine the contract revenue recognised in the period and the methods used to determine the stage of completion of contracts in progress. (c) IFRS Foundation A623 IAS 11 40 An entity shall disclose each of the following for contracts in progress at the end of the reporting period (a) the aggregate amount of costs incurred and recognised profits (less recognised losses) to date the amount of advances received and the amount of retentions. b) (c) 41 Retentions are amounts of progress billings that are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified. Progress billings are amounts billed for work performed on a contract whether or n ot they have been paid by the customer. Advances are amounts received by the contractor before the related work is performed. An entity shall present (a) (b) the gross amount due from customers for contract work as an asset and the gross amount due to customers for contract work as a liability. 2 43 The gross amount due from customers for contract work is the net amount of (a) (b) costs incurred plus recognised profits less the sum of recognised losses and progress billings for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceeds progress billings. 44 The gross amount due to customers for contract work is the net amount of (a) (b) costs incurred plus recognised profits less the sum of recognised losses and progress billings or all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). 45 An entity discloses any possible liabilities and contingent assets in accor dance with IAS 37 Provisions, item Liabilities and Contingent Assets. Contingent liabilities and contingent assets may arise from such items as warranty costs, claims, penalties or possible losses. Effective date 46 This Standard becomes operative for financial statements covering periods beginning on or after 1 January 1995. A624 IFRS Foundation