Accounting Standard 7: Construction Contracts

Note:

1.  This accounting standard is mandatory in nature and is applicable to contractors only.
2.  This  accounting standard is applied to calculate profit of contracts undertaken by contractors.

How to calculate profit:

Contract revenue   x     Degree of completion    =      xxxxx

less:   Contract Cost incurred                                     (xxxx)

= Total Profit                                                             xxxxx

less:    Profit already recognized in earlier years       (xxxx)

=   Profit Or Loss                                                       xxxxx

Meaning of Contract Cost:

Contract cost means expenditure incurred at site on a particular contract. these expenses can be :

1. Direct expenses
2. In Direct Expenses

Meaning of Contract Revenue:

It means revenue from contract arising from:

 The initial contract amount         xxxx

 +   Variation/Incentives             xxxx

 +   Claims/Escalation                xxxx

 =   Contract revenue                 xxxx

Notes to above:

• Variation means increase in agreed performance.
• Claim means recovery of loss/expenses from contractee
• Escalation means recovery of extra cost due to inflation
• Incentive means prize for better quality or timely competition

These items are considered as contract revenue if their realization is certain.

Degree of completion:

Degree of completion means percentage of work performed and is calculated as follows:

      Cost incurred Cumulative    x   100

       Total estimated cost

Whenever there is a total loss,then provision for expected loss should be made as follows:

                    Toltal Expected Cost                =    xxxxx

                    less:  Total Expected revenue    =    (xxx)

                    =     Total Loss                               xxxx

                    less:  Loss recognized               =    (xxx) 

                    =      Provision                                xxxx

   Provision should be cancelled in the next year every time.

Types of Contracts:

1. Cost plus contracts:

          Whenever revenue is calculated by percentage to cost incurred. It means that the contractor get contract cost plus a fixed percentage as profit.

    

    2.   Fixed Amount Contracts:

             Where contract revenue is fixed and settled as per agreement. Contractor gets a lump sum amount for cost as well as profit.

Dislosure Requirements:

• Contract revenue
• Contract Cost incurred
• Contract Profit

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