Chapter 19

CONSTRUCTION CONTRACTS (IAS 11)

Objective
This objective of this IAS is to provide accounting treatment of contract revenue and
cost associated with the construction contracts, particularly the allocation of
contract costs and contract revenues over different accounting periods as the
construction activity starts and completed in different accounting periods.
Scope
This IAS should be applied in accounting for construction contracts in the financial
statements of contractors.
Definitions
Construction contract is a contract specifically negotiated for the construction of an
asset or a combination of assets that are closely interrelated or interdependence in
terms of their design, technology and function or their ultimate purpose or use.
Fixed price contract is a construction contract in which contractors agrees to a fixed
contract price, or a fixed rate per unit of output, which in some cases is subject to
cost escalation clauses.
Cost-plus contract is a construction contract in which the contractor is reimbursed
for allowable or otherwise defined costs, plus a percentage of these costs or a fixed
price.
A contract may be a single contract like construction of a bridge or dam and can
be a contract for a series of contracts, which are closely interrelated or
interdependent in terms of design, technology or construction. Construction
contracts include contracts for rendering of services and destruction/restoration of
assets.
Combining and segmenting construction contracts
When a construction contract covers a number of assets, each asset will be treated
as separate construction contract when: -
a) Separate proposals have been submitted for each asset
b) Each asset has been subject to separate negotiation and contractor and
customer have been able to accept or reject that part of the contract
relating to each asset; and
c) The costs and revenues of each asset can be identified
A group of contracts, whether with a single customer or with several costumers shall
be treated as a single contract when: -
a) The group of contracts negotiated as a single contract
b) The contracts are so closely interrelated that they are in effect part of a single
project with an overall profit margin; and
c) The contracts are performed concurrently or in a continuous sequence
A contract may include an additional asset at the option of the customer, the
construction of additional asset shall be treated as a separate construction contract
when: -
a) The asset differs significantly in design, technology or function from the asset
or assets covered by the original contract; or
b) The price of the asset is negotiated without regard to the original contract
price

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Contract revenue
Contract revenue includes: -
a) The initial amount of revenue agreed in the contract; and
b) Variations in contract work, claims and incentive payments: -
i) to the extent that it is probable that they will result in revenue; and
ii) they are capable of being reliably measured
Contract revenues are measured at the fair value of consideration received or
receivable. The contract revenue is affected by a number of uncertainties, which
may require the revision of revenue estimates (such as variations in the contract,
cost escalation clauses, penalties & claims, incentives etc.)
The variations are included in the revenue when: -
a) it is probable that the customer will approve the variation/amount of revenue
arising from variation
b) the amount of revenue can be measured reliably
The claims are included in the revenue only when: -
a) negotiations have reached the advanced stage and it is probable that the
customer will accept the claim
b) the amount probable to be accepted by the customer can be measured
reliably
Incentive payments are included in the revenue when: -
a) the contract is sufficiently advanced that it is probable that the specified
performance standards will be met or exceeded
b) the amount of incentive payments can be measured reliably
Contract costs
Contract costs are: -
a) costs specifically related to the contract
b) general costs attributable to the contract; and
c) such other costs specifically chargeable to the customer under the terms of
the contract (administrative costs, development costs etc.)
Examples of specific costs are: -
a) site labor costs, including site supervision;
b) costs of materials used in construction;
c) depreciation of plant and machinery used on the contract;
d) costs of moving plant, equipment and materials to or from the site;
e) costs of hiring plant and equipment
f) costs of design and technical assistance that is directly related to the
contract;
g) the estimated costs of rectification and guarantee work, including expected
warranty costs; and
h) claims from third parties
The above stated costs will be reduced any incidental income such as from sale of
surplus materials, wastes etc.
Examples of general costs are: -
a) insurance;
b) costs of design and technical assistance that are not directly related to a
specific contract; and
c) construction overheads
Examples of costs excluded from the contract costs are: -
a) general administrative and development costs for which is reimbursement is
not specified in the contract;
b) selling costs;

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c) research and development costs for which reimbursement is not specified in
the contract; and
d) depreciation of idle plant and machinery that is not used on a particular
contract
Recognition of contract revenue and expenses
When the outcome of a construction contract can be measured reliably, contract
revenues and associated contract costs will be recognized as revenue and
expenses by reference to the stage of completion of the contract at the balance
sheet date. Any expected loss on the contract shall be recognized as an expense
immediately.
Estimation of outcome of a construction contract
Fixed price contract, the outcome of a fixed price contract can be measured
reliably when: -
a) Total contract revenue can be measured reliably
b) The associated economic benefits will flow to the entity
c) Both contract cost to complete and the stage of completion can be
measured reliably; and
d) Contract costs are clearly identifiable and measured reliably so that contract
costs incurred can be measured reliably
Cost plus contract, the outcome of cost plus contract can be measured reliably
when: -
a) The associated economic benefits will flow to the entity; and
b) The contract costs attributable to the contract, whether associated or not
specifically reimbursable, can be clearly identified and measured reliably
Recognition of contract revenue under various methods
Contract revenue is generally recognized under the following methods: -
a) The proportion the contract costs incurred for work performed to date bear to
the estimated total costs;
b) Survey of work performed; or
c) Completion of physical proportion of the contract work
Following are the steps: -
Match contract revenue with the contract costs in reaching the stage of
completion (costs incurred to date/(costs incurred to date + estimated costs
to complete the contract)
Contracts costs related to future activity should be recognized as an asset
and not to be taken in the figure of costs to date such as materials delivered
on the site to be used in the future activity unless specifically purchased for
the contract, payments in advance to subcontractors (contract work in
progress)
The percentage of completion method is to be applied on cumulative basis
in each accounting period to the current estimates of contract revenue or
contract costs. Any change in the estimate of contract revenue or contract
costs is accounted for as change in accounting estimate.
If any uncertainty arises about the calculability of any amount already
recognized in revenue should be charged as expense rather than deduction
from the contract revenue.
When the outcome of a contract cant be estimated reliably: -
a) revenue shall be recognized to the extent of contract costs incurred that is
probable will be recoverable; and
b) contract costs shall be recognized as an expense in the period in which they
are incurred

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Examples of circumstances when the recoverability of the contract may not be
probable and contract costs to be recognized as expenses include the contracts: -
a) which are not enforceable;
b) the completion is subject to pending litigation;
c) relating to properties that are likely to be condemned or expropriated;
d) where the customer is unable to meet its obligation; or
e) where the contractor is unable to meet its obligation under the contract
Recognition of expected losses
When it is probable that the contract cost will exceed total contract revenue, the
expected loss should be recognized as an expense immediately.
The amount of loss will be recognized irrespective of the following: -
a) whether the work has commenced on the contract;
b) the stage of completion of the contract; and
c) the amount of profits expected to arise on other contracts which are not
treated as a single contract
Disclosures
The following disclosures to be made: -
a) the amount of contract revenue recognized during the period;
b) the method used to determine the contract revenue; and
c) the method used to determine the stage of completion;
The following further disclosures to be made for each contract in progress: -
a) the aggregate amount of costs incurred and recognized profits (less
recognized losses0 to date;
b) the amount of advances received; and
c) the amount of retentions
An entity shall present: -
a) the gross amount due from customers for contract work as asset, for all
contracts where costs incurred plus profit recognized (loss) exceeds the
progress billings
(costs incurred to date plus recognized profit less the sum of recognized losses
and progress billings)
b) the gross amount due to customers for contract work as liability for all
contracts where the progress billings exceeds costs incurred plus profit
recognized (loss)
(costs incurred to date plus recognized profit less the sum of recognized losses
and progress billings)

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PAST PAPERS QUESTI ONS
Q-1
Remal Enterprises commenced business as building contractors January 1, 1996 with
a capital of Rs. 1,000 paid into bank account. The contractor was awarded a
contract on March 31, 1996 to construct a Hospital building. The contract price was
agreed at Rs. 2,000. It was agreed that the contract should be completed by
December 31, 1998
The contractor made following payments in 1996: Rs.
Materials purchases 250
Wages 130
Site supervision 100
Lease rentals of hired equipment 26
Mobilization costs in shifting plant, equipment and materials to the 21
construction site
Design and technical assistance 3
Other expenses 20
550
Materials inventory at December 31 1996 amounted to Rs. 50.
During 1996 the contractor billed the customer Rs. 600 against progress billings. Cash
received amount to Rs. 500.
At December 31, 1996 it was estimated that further cost to complete this contract
would amount to Rs. 1,100.
During 1997 following payments were made Rs.
Material purchases 475
Wages 200
Site supervision 100
Lease rentals of hired equipment 26
Sub contractors 20
Other expenses 4
825
Materials inventory at Dec. 31, 1997 75
During 1997 the contractor billed the customer Rs. 1,100 against progress billings.
Cash received from customer in 1997 amounted to Rs. 1,000.
At December 31, 1997 the contractor made a fresh estimate of costs of complete
the contract. The latest estimates revealed that further cost of Rs. 300 will be incurred
in 1998.
During 1998, the company made following payments: Rs.
Materials purchases 165
Wages 150
Site supervision 50
Demobilization 10
375
Materials un-used was returned to the stores at cost Rs. 100. Progress billing
amounted to Rs. 300 and cash received was Rs. 100.
Required:
For the year 1996, 1997 and 1998:
a) Determine percentage completion of contract work.
b) Compute revenues to be recognized.
c) Prepare journal entries
d) Prepare following ledger accounts

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 i) Contract work in progress
ii) Accounts receivable
iii) Cash
e) Prepare income statement and balance sheet.
Q-2
Following is the data relating to Fine builders who commenced work on a contract
from January 1, 19X1.
Rs.
Contract price 7,500
Costs incurred in 19X1
Machinery and equipment 700
Wages 1,500
Contract overheads 400
Materials 2,000
Sub contract costs 300
Part of the machinery costing Rs. 200 was unsuited for the work and was sold at a
profit of Rs. 50.
The value of the machinery and equipment on December, 31 19X1 was Rs. 400 and
the value of materials then on hand was Rs. 300.
In order to calculate the profit made on the contract up to December 31, 19X1 the
contractor estimated additional expenditure that would be incurred to complete
the job. The profit recognized is that percentage of estimated total profit that
incurred costs to date bear to estimated total costs.
Other information
i) The contract would be completed by June 30, 19X2.
ii) The machinery and equipment would have a residual value of Rs. 100 upon
the completion of contract.
iii) The cost of the materials required in addition to those in stocks on December
31, 19X1 would be Rs. 1,000 and that further sub contract cost of Rs. 200
would be incurred.
iv) Wages on the contract for six months ending June 30, 19X2 would amount to
Rs. 800.
v) Contract overheads will amount to the same sum per month as in the
previous year; and
vi) 2.5% of total cost of the contract (excluding this percentage) should be
provided for maintenance and contingencies. The charge is made only at
end of the contract.
Required
a) Prepare Work in Progress Account for the year ended December 31, 19X1 and
show your calculations for the profit to be recognized?
b) Balance sheet extract for the year 19X1?
Q-3
Salman Co has two contracts in progress, the details of which are as follows:
School Club
(Profitable) (Loss-making)
Rs. 000 Rs. 000
Total contract price 300 300
Costs incurred to date 90 150
Estimated costs to completion 135 225
Progress payments invoiced and received 116 11

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Required:
Show extract from the income statement and the balance sheet for each contract,
assuming that School and Club contracts are 40% complete?
Q-4
Merry view specializes in construction contracts. One of its contracts, with Better
Homes, is to build a complex of luxury flats. The price agreed for the contract is Rs.40
million and its scheduled date of completion is 31 December 2002. Details of the
contract to 31 March 2001 are:
Commencement date 1 July
2000
Contract costs: Rs.000
Architects and surveyors fees 500
Materials delivered to site 3,100
Direct labor costs 3,500
Overheads are apportioned at 40% of direct labor costs Estimated cost to complete
(excluding depreciation see below) 14,800,000 Plant and machinery used
exclusively on the contract cost Rs.3,600,000 on 1 July 2000. At the end of the
contract it is expected to be transferred to a different contract at a value of
Rs.600,000. Depreciation is to be based on a time apportioned basis.
Inventory of materials on site at 31 March 2001 is Rs.300,000.
Better Homes paid a progress payment of Rs.12,800,000 to Merry view on 31 March
2001.
At 31 March 2002 the details for the construction contract have been summarized
as:
Contract costs to date (i.e. since the start of the contract) excluding all depreciation
20,400
Estimated cost to complete (excluding depreciation) 6,600
A further progress payment of Rs.16,200,000 was received on 31 March 2002.
Merry view accrues profit on its construction contracts using the percentage of
completion basis as measured by the percentage of the cost to date compared to
the total estimated contract cost.
Required:
(a) Prepare extracts of the financial statements of Merry view for the construction
contract with Better Homes for:
(i) the year to 31 March 2001;
(ii) the year to 31 March 2002.
Q-5
Linnet is part way through a contract to build a new football stadium at a
contracted price of Rs.300 million.
Details of the progress of this contract at 1 April 2003 are shown below:
Rs. million
Cumulative sales revenue invoiced 150
Cumulative cost of sales to date 112
Profit to date 38
The following information has been extracted from the accounting records at 31
March 2004: Rs.
million
Total progress payment received for work certified at 29 February 2004 180
Total costs incurred to date (excluding rectification costs below) 195
Rectification costs 17

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Linnet has received progress payments of 90% of the work certified at 29 February
2004. Linnets surveyor has estimated the sales value of the further work completed
during March 2004 was Rs.20 million.
At 31 March 2004 the estimated remaining costs to complete the contract were
Rs.45 million.
The rectification costs are the costs incurred in widening access roads to the
stadium. This was the result of an error by Linnets architect when he made his initial
drawings.
Linnet calculates the percentage of completion of its contracts as the proportion of
sales value earned to date compared to the contract price. All estimates can be
taken as being reliable.
Required:
Prepare extracts of the financial statements for Linnet for the above contract for the
year to 31 March 2004?
Q.6
Mughals Limited, a firm of civil contractors, specializes in construction of highways.
They entered into a contract with the National Highway Authority (NHA) in the year
2003 for construction of National Highway covering 1500 kilometers and having 6
lanes. However, it was agreed that work shall commence on February 1, 2004. The
agreed price was Rs.3.6 billion. The company closes its accounts on May 31.
On February 1, 2005 the NHA requested the company for extending the highway by
adding two further lanes. NHA was of the view that the price of this extension shall
be in the same proportion i.e. Rs. 1.2 billion, as there has been no significant increase
in costs since the signing of the contract in 2003. However Mughals Limited refused
to accept this price. Their board of directors was of the view that their company was
in a position to sign another contract if they forego the offer by NHA. After extensive
negotiations, the price of the extended work was agreed at Rs. 1.6 billion. It was also
agreed that the work on additional lanes will be carried out simultaneously and will
be completed on November 30, 2006.
The following data is available in respect of the above contract:
As at May 31
2004 2005 2006

Original Contract Rupees in million

Progressive billing to date 800 2,500 3,400
Amount received to date 600 2,400 3,240
Mobilization advance (included in the
above) 180 180 180
Actual cost to date 600 2,000 2,680
Value of work certified by NHA 300 2,000 3,300
Profit (latest estimate) 600 900 720

Additional Work
Progressive billing to date -- 200 1,100
Amount received to date -- 80 800
Mobilization advance (included in the
above) -- 80 80
Actual cost to date -- 100 580
Value of work certified by NHA -- -- 1,000
Profit (latest estimate) -- 700 600

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 There is a clause in the agreement that NHA will pay an early completion
bonus of Rs.5.0 million per week. However in case of delay it will levy a
penalty of Rs.10.0 million for each week the completion is delayed. In case of
the original agreement the company has always been confident that the
contract will be completed two weeks ahead of time and was actually
completed accordingly. In case of additional work the chances of delay at
year-end were considered as:
2005 2006
Delay of two weeks Possible Probable
Delay of three weeks Remote Possible
Delay of four weeks -- Remote

Required:
(a) Discuss whether the contract for additional work shall be treated as a
separate contract or a part of the original contract, according to IAS-11
(Construction Contracts)?
(b) Prepare extracts of the Income Statement and Balance Sheet of Mughals
Limited for the years to May 31, 2005 and 2006 in respect of the above
contract along with necessary disclosures regarding treatment of bonus and
penalty as discussed above?
Q.7
Silver Construction Limited (SCL) was incorporated on July 1, 2007 with a share
capital of Rs. 500 million. It is involved in the construction of bridges, dams,
pipelines, roads etc. During the year ended June 30, 2008, the company
commenced work on six contracts, details of which are as follows:
CONTRACTS
I II III IV V VI
Rupees in millions
Total contract price 300 375 280 400 270 1,200
Billing up to June 30, 2008 200 110 280 235 205 1,200
Contract cost incurred up to
June 30, 2008 248 68 186 246 185 1,175
Estimated further cost to
complete 67 221 - 164 15 -

Following additional information is available:

(i) As per terms of Contract IV, the company will receive an additional Rs.40
million if the construction is completed within a period of twelve months
from the commencement of the contract. The management feels that
there is a 90% probability that it will be able to meet the target.
(ii) An amount of Rs. 16 million was incurred on Contract II on account of a
change in design. The company has discussed it with the customer who
has informed SCL that the amount is on the higher side and needs to be
revised.
Required:
(a) Make relevant calculations and prepare appropriate extracts to be
reflected in the Balance Sheet and Income Statement for the year ended
June 30, 2008?
(b) Justify your accounting treatment in respect of the additional information
provided above?

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Q-8
Modern construction Limited (MCL) was established on July 01, 2008. It had entered
into two different contracts up to June 30, 2010 and their progress is as under: -
Contract A Contract B
Contract start date 1-1-2009 1-9-2009
Work certified and billed up to June 30, 2009 25% -
Work certified and billed up to June 30, 2010 80% 20%
Work completed but not certified up to June 30, 2010 -- 5%
Rs. (M) Rs. (M)
Contract price 800 400
Cost incurred up to June 30, 2009 180 -
Cost incurred during the year ended June 30, 2010 420 125
Estimated cost to complete on June 30, 2009 500 -
Estimated cost to complete on June 30, 2010 100 270
Un paid bills (gross) as on June 30, 2010 140 -

Other relevant information is as under: -

(i) The company recognizes contract revenue and expenses using % of
completion method.
(ii) 10% of contract price had been paid as advance on signing of each
contract and is adjustable from the progress payments.
(iii) A progress bill is raised on the basis of work % certified by the consultant. All
customers deduct 5% retention money from the progress bills.
(iv) Contract costs incurred during the year do not include:
Retainer-ship fee amounting to Rs. 2 million paid to the consultant for
technical assistance on contracts A and B. 30% of the consultants time
was used on contract A and 70% on contract B.
Research cost for improving work quality and cost efficiency
amounting to Rs. 1.9 million.
(v) The company is required to rectify all the defects during warranty period of
one year. It is estimated that rectification costs to be incurred during warranty
period would be 5% of the contract price.
Required:
Prepare appropriate extracts to be reflected in the Statement of Financial Position,
Income Statement and relevant notes to the accounts for the year ended June 30,
2010 in accordance with IAS 11 (Construction Contracts)?
Q.9
Kamal Associates won first contract of the financial year on April 1, 2001 for
destruction of a group of ten buildings of similar size and technical specification for a
price of Rs 2 million. The work was to be completed within six months of an award of
the contract failing that a penalty of 6% per annum of the contract price would be
paid to the customer for the delay.
Following information was available as at June 30, 2001; the date on which Kamal
Associates close their financial year. On that date five buildings were demolished.
Site labor Rs 200,000; site supervision Rs 150,000; material used Rs 250,000;
depreciation on plant used at site Rs 100,000; general and administration costs Rs
50,000; research and development costs Rs 25,000; selling costs Rs 25,000: Other
construction overheads Rs 200,000.
The management of Kamal Associates compared above information with budgeted
cost of the contract and was satisfied with performance except that it would require

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four months to complete the rest of the contract. Due to delay in completion and
inflation, cost overrun would be as follows:
Increase in wages of site labor by 10%. Escalation in material cost by 20%. Other
construction overhead would increase by 20%. Research and development cost to
go down by Rs 5,000.
Subsequent to June 30, 2001 Kamal Associates was notified of a claim of Rs 50,000
from third party for damage done to a building next to the one demolished by
Kamal Associates. Kamal Associates accepted the claim.
Required:
Prepare contract account clearly indicating profit earned or loss incurred as at the
close of financial year on June 30, 2001 in accordance with IAS 11 Construction
Contracts?
Q.10
ABC is a limited liability company mainly engaged in construction of dams and
power houses. It has won a contract to construct a dam on River Indus. The contract
was awarded to ABC on July 01, 2010 but work could not be started till the end of
September 2010.
ABC received mobilization advance equal to 10% of the contract value of Rs. 5,000
million on August 31, 2010. ABC has to complete the dam within 5 years of the
signing of the contract. To avoid liquidity problems ABC arranged short term running
finance of Rs. 1,000 million @ 19.5% from a local bank on October 15, 2010.
The progress billings raised during the year were Rs. 500 million. The whole amount
was received after adjustment of mobilization advance and retention money. The
retention money is 10% of the progress billings raised, receivable after three years of
successful completion of the dam and mobilization advance will be adjusted
equally over five years.
ABC incurred the following cost on the construction of dam

Rs. (m)
Fee paid to surveyors 200
Raw material used 500
Designing cost incurred 400
Fee paid to consultants 100
Labor and other overheads 150
Total cost 1,350
The expected future cost to complete the contract is Rs. 2,550 millions.
The work certified at the end of June 30, 2011 is Rs. 1,200 millions. ABC uses survey of
work performed method for determining stage of completion of contracts.
Total interest cost accrued during the year ended June 30, 2011 was Rs. 120 million.
Required: -
Provide extract of statement of financial position and statement of comprehensive
income for year ended June 30, 2011?
Q.11
Quality Works Limited (QWL) undertakes construction contracts. The following
information pertains to one of its contracts under progress as at June 30, 2014.
(i) Price of the contract is agreed at Rs. 3,000 million and cost to complete is
estimated at Rs. 2,400 million. Construction work was started on 01 July 2012
and is planned to complete on 31 December 2014. Progress of the contract is
summarized as under: -
As at 30 As at 30
June 2014 June 2013

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 Rs. (m) Rs. (m)
Accumulated actual cost 2,560 1,500
Revised estimated cost to complete the contract 2,900 2,600
Unpaid gross bill as at 30 June 2014 100 75
Work certified and billed 80% 45%

(ii) QWL recognizes contract revenue and cost under percentage of completion
method.
(iii) Actual cost includes cost of preparation of quotations amounting to Rs. 7
million.
(iv) Payment terms as agreed with the client are as under: -
a) Payment of 10% of contract price on signing of the contract,
adjustable from the monthly progress billings.
b) Deduction of 5% retention money from the monthly progress billings.
The amount is refundable at the end of warranty period i.e. one year
after completion of contract.
(v) QWL is required to rectify defects, if any, during the warranty period. Cost of
rectification is estimated at 5% of the contract price.
Required: -
In light of the International Financial Reporting Standards, prepare relevant extract
from the following: -
a) Statement of financial position as at 30 June 2014? (08)
b) Statement of comprehensive income for the year 30 June 2014? (07)
(Show comparative figures and ignore taxation)

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ANSWERS TO IAS 11
A-1
Extract to statement of financial position
1996 1997 1998
Due from customers Rs. Rs. Rs.
Cost to date 550 1,375 1,650
Profit to date 125 325 350
Contract work in progress 675 1,700 2,000
Progress billings to date (600) (1,700) (2,000)
75 -- --
Receivables
Progress billings to date 600 1,700 2,000
Receipts to date (500) (1,500) (1,600)
100 200 400
Extract to statement of comprehensive income
Revenue 625 1,000 375
Cost of revenue (500) (800) (350)
Profit for the year 125 200 25

W-1 Stage of completion

Revenue 2,000 2,000 2,000
Cost to date A 550 1,375 1,750
Un- used raw material B 50 75 100
Future cost C 1,100 300 --
Stage of completion [(A-B)/(A-B+C)]x100 31.25% 81.25% 100%
W-2 Profit to date
Revenue to date 625 1,625 2,000
Expense to date (500) (1,300) (1,650)
Profit to date 125 325 350

A-2

FINE BUILDERS
Statement of Financial Position as at December 31, 19X1 (EXTRACT)

Note Rupees
ASSETS

CURRENT
ASSETS

Due from customers against contract work in

1 4,584
progress

Statement of Comprehensive Income for the year ended 31, 19X1 (EXTRACT)

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 Note Rupees
PROFIT AND LOSS ACCOUNT

Revenue 5 4,280
( Stage of completion
Expenses
basis ) (3,946)
( Balancing figure
Profit 334
)

NOTES TO THE ACCOUNTS

Rupees
1. Due from/ (Due to ) Customers

Cost to date 4,250

Profit to date 334
4,584
Progress billings to date -
Due from customer 4,584

2. Stage of Completion
Cost incurred to date to total cost basis

3,950
= X 100
3,950 + 2,973

= 57%

Rupees
3. Contract cost to date

Machinery (700 - 400 -250) 50

Wages 1,500
Contract overheads 400
Materials 2,000
Sub - contract cost 300
4,250
Un-used R/M
(300)
Cost to
3,950
date

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 4. Future cost

Machinery 300
Material 1,300
Wages 800
contract overheads 200
Sub-contract cost 200
Provision for warranty 173
2.5%
(3,950 + 2,800) X
97.5%

Future Cost 2,973

5. Contract Revenue to date

Total Contract Revenue 7,500

Stage of completion 57%

Contract revenue to date 4,280

A-3
Extract to statement of financial position
School Club
Due from customers Rs. (000) Rs. (000)
Cost to date 90 150
Profit / (loss) to date 30 (75)
Contract work in progress 120 75
Progress billings to date (116) (11)
4 64
Receivables
Progress billings to date 116 11
Receipts to date (116) (11)
-- --
Extract to statement of comprehensive income
Revenue 120 120
Cost of revenue (90) (150)
Profit/ (loss) 30 (30)
Provision for onerous contract -- (45)
Net profit / (loss) 30 (75)

A-4
a)
Merry view- Income statement (Extract) year to March 31, 2001
Rs. (000)
Sales revenue 14,000
Cost of sales (w (i)) (9,100)
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Profit on contract 4,900

Balance sheet extract as at March 31, 2001

Non- current assets
Plant and machinery (3,600-900) (w (ii)) 2,700
Current assets
Amount due from customer (w(iii)) 1,500
ii) Income statement extract March 31, 2002
Sales revenue (40,000x75%-14,000 (w(ii)) 16,000
Cost of sales (22,500-9,100) (w (iii)) (13,400)
Profit on contract 2,600
Balance sheet extract March 31, 2002
Plant and machinery (3,600-900-1,200)(w(iii)) 1,500
Amount due from customers (w (iii)) 1,000
Workings
i) Contract cost as at March 31, 2002
Architects and supervisor fee 500
Materials used (3,100-300) 2,800
Direct labore 3,500
Over heads (3,500x40%) 1,400
Plant and machinery depreciation 900
Cost at March 31, 2001 9,100

Estimated cost to complete

Excluding depreciation 14,800
Plant depreciation (3,600-600-900) 2,100
16,900
Total estimated cost to complete 26,000
Percentage of completion (9,100/26,000) 35%

Contract costs as at March 31, 2002

Summarized costs excluding depreciation 20,400
Plant depreciation (21 months @ 100) 2,100
22,500
Cost to date
Estimated cost to complete
Excluding depreciation 6,600
Plant depreciation 900
7,500
Estimated total costs on completion 30,000
Percentage of completion (22,500/30,000)*100 75%

ii)
The plant has a depreciable amount of Rs.3,000 (3,600 600 residual value) Its
estimated life on this contract is 30 months (1 July 2000 to 31 December 2002)
Depreciation would be Rs.100 per month i.e. Rs.900 for the period to 31 March 2001;
Rs.1,200 for the period to 31 March 2002; and a further Rs.900 to completion.
iii)

Page 16 of 23
Amount due from customers 2001 2002
Contract cost to date 9,400 22,500
Profit to date 4,900 7,500
Contract work in progress 14,300 30,000
Cash received to date (12,800) (29,000)
Due from customers 1,500 1,000
A-5
Income statement March 31, 2004 Rs. (m)
Sales revenue 70
Cost of sales (w (i)) (81)
Loss for the year (11)
Balance sheet March 31, 2004
Cost to date 195
Profit to date 44
239
Progress billings to date (180)
Due from customers 59

Workings
Cumulative 1 April Cumulative 31, Amounts for the
2003 March 2004 year
Sales 150 220 70
Cost of sales (112) (176) (64)
Rectification costs Nil (17) (17)
38 27 (11)

i) Progress payments received are Rs.180 million. This is 90% of the work certified
(at 29 February 2004), therefore the work certified at that date was Rs.200
million. The value of the further work completed in March 2004 is given as
Rs.20 million, giving a total value of contract sales at 31 March 2004 of
Rs.220 million.
ii) the total estimated profit (excluding rectification costs) is Rs.60 million:
Rs. million
Contract price 300
Cost to date (195)
Estimated cost to complete (45)
Estimated total profit 60

The degree of completion (by the method given in the question) is 220/300
Therefore the profit to date (before rectification costs) is Rs.44 million (Rs.60 million
220/300). Rectification costs must be charged to the period they were incurred and
not spread over the remainder of the contract life. Therefore after rectification costs
of Rs.17 million the total reported contract profit to 31 March 2004 would be Rs.27
million. With contract revenue of Rs.220 million and profit to date of Rs.44 million, this
means contract costs (excluding rectification costs) would be Rs.176 million. The
difference between this figure and total cost incurred of Rs.195 million is part of the
Rs.59 million of the amounts due from customers shown in the balance sheet.
A-6
Mughal Limited
Extract to statement of financial position

Page 17 of 23
For the year ended
2006 2005
Cont. A Cont. B Cont. A Cont. B
Due from /(due to) customers Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Cost to date 2,680 580 2,000 100
Profit to date 658 380 500 --
Contract work in progress 3,338 960 2,500 100
Progress billings to date (3,400) (1,100) (2,500) (200)
(62) 140 -- (100)
Receivable / (payable)
Progress billings to date 3,400 1,100 2,500 200
Receipts to date (3,060) (720) (2,220) --
Adjustments to mobilization advance (180) (80) (180) (80)
160 300 100 120

Mughal Limited
Extract to statement of comprehensive income
For the year ended
2006 2005
Cont. A Cont. B Cont. A Cont. B
Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Revenue 1,300 1,000 1,700 --
Cost of revenue (1,142) (620) (1,250) --
Profit / (loss) 158 380 450 --

W-1 Stage of completion (Cont. A) 2004 2005 2006

Revenue 3,600 3,600 3,600
Incentive 10 10
A 3,600 3,610 3,610
Value of work certified B 300 2,000 3,300
(B/A)x100 8.3% 55.4% 91.4%
W-2 profit to date (Cont. A) 2004 2005 2006
Revenue to date 300 2,000 3,300
Expenses to date (balancing) (250) (1,500) (2,642)
Profit to date 50 500 658
W-3 Stage of completion (Cont. B)
Revenue 1,600 1,600
Penalty -- (20)
Net revenue A 1,600 1,580
Value of work certified B -- 1,000
%age of completion (B/A)x100 0% 63.3%
W-2 profit to date (Cont. A) 2006
Revenue to date 1,000
Expenses to date (balancing) (620)
Profit to date 380

Page 18 of 23
A-7
Silver Construction Limited
Extracts from Income Statement
For the year ended June 30, 2008

Rs. in million
Contract revenue recognized 2,318.18

Contract costs recognized (2,108.00)

Silver Construction Limited

Extracts from Balance Sheet
As of June 30, 2008

Rs. in million
ASSETS
Due from customers 106.75

LIABILITIES
Due to customers 21.76
Working schedule
I II III IV V VI Total
Rupees in Million
Contract price 300 375 280 400 270 1,200 2,825.00
Incentive payments - - - 40 - - 40.00
Total contract price (A) 300 375 280 440 270 1,200 2,865.00
Contract cost incurred to (B) 248 68 186 246 185 1,175 2,108.00
date
Estimated further costs 67 221 - 164 15 - 467.00
Total estimated costs to (C) 315 289 186 410 200 1,175 2,575.00

Completion % B / C x (D) 78.73% 23.53% 100% 60% 92.50% 100%

Revenue to be recognized (E) 236.19 88.24 280.00 264.00 249.75 1,200 2,318.18

Expected losses from (A- (15.00) - - - - - (15.00)

*233.00 88.24 280.00 264.00 249.75 1,200

Amount recoverable from (E)
Progress billings 200.00 110.00 280.00 235.00 205.00 1,200
Due from customers 33.00 - - 29.00 44.75 - 106.75
Due to customers - (21.76) - - - (21.76)
* Cost to be recognized expected losses = 248 15 = 233
(b) Comments on additional information
(i) Incentive payments are included in contract revenue when:
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.
Since the Contract IV is in advance stage and the probability to
achieve the target is very high, the company should recognize the
incentive payment to be received, on this contract.
(ii) Claims are recorded in contract revenue only when:
Negotiations have reached an advanced stage such that it is

Page 19 of 23
 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.
Since the claim amount cannot be measured reliably, the claim should not be
recognized as contract revenue.
A-8
Extracts from Statement of Comprehensive Income for the year ended June 30, 2010
Rs. in million
Contract revenue recognized (800 x 55%) + (400 x 25%) 540.00
Contract costs recognized (412.48+116.4) W-2 528.88
Statement of Financial Position as of June 30, 2010

Assets
Construction contracts in progress (8.12+42.3) Note-1 50.42
Account receivables (Net unpaid bills) (140*0.85) 119.0
0
Retentions held by the customers (640+80)*5% 36.00
Liabilities
Advances received from the customers {(800+400)-(640+80)}*10% 48.00
Notes to the accounts for the year ended June 30, 2010
Note 1: Construction contracts in progress A B
Rs. in million
Contract costs incurred up to June 30, 2010 (126.40 + 600.60 138.70
12.30) (c)
Recognized profit/(loss) (59.40 x80%)/(16.40 X 100%) 47.52 (16.40)
648.12 122.30
Progress billings up to June 30, 2010 640.00 80.00
8.12 42.30
W-1 - Expected profit / (loss) on A B
completion of the contracts:
As of For the For the For the
June year year 2010 year
30, 2009 2010
2010
Contract price 800.00 800.00 800.00 400.0 0
(a)
Work completion % up to June 30, 2010 80% 25% 55% 25%
(b)
contract costs incurred 600.00 180.00 420.00 125.0 0
Technical assistance fee incurred but not 0.60 0.60 1.40
allocated to the contracts
600.60 180.00 420.60 126.4 0
(c)
Estimated costs to complete 100.00 500.00 100.00 270.0 0
Estimated warranty works (5% of the 40.00 40.00 40.00 20.00
contract price)
Total estimated costs to complete the 740.60 720.00 560.60 416.4 0
contracts (d)
Estimated profit / (losse) on completion of 59.40 (16.40 )
the contracts. (a)-(d)

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W-2 : Contract costs to be recognized for the year ended June 30, 2010
Costs to be recognized up to June 30, 2010 W-1 (d)*(b) 592.48 104.10
Less: Costs recognized up to June 30, 2009 {(180+500)+(800*0.05)}*0.25 180.00 -
Costs for the year ended June 30, 2010 412.48 104.10
Add: Loss to be recognized {(400*0.25)+16.4}-104.1} 12.30
Contract costs to be recognized for 2010 412.48 116.40
A-9
Extract of statement of financial position
Rs. (m) Rs. (m)
Assets
Cost to date 1,470
Profit to date 235
Work in progress 1,705
Progress billings to date (500)
Due from customers 1,205
Retention money (500*.10) 50
Liabilities
Mobilization advance (5,000x10%) = (500-100) 400
Running finance 1,000

Extract of statement of comprehensive income

Rs. (m) Rs. (m)
Revenue 1,200
Expenses (965)
Profit for the year (980x.24) 235
Workings
W-1 Rs. (000)
Stage of completion
Work certified to date 1,200
Total revenue 5,000 1,200/5,000x100
24%
Cost to date (120+1,350) 1,470
Future cost 2,550
Total cost 4,020
Expected profit (5,000-3,900) 980

A-10
Extract of statement of financial position
Rs. (m) Rs. (m)
Assets
Cost to date 1,470
Profit to date 235
Work in progress 1,705
Progress billings to date (500)
Due from customers 1,205
Retention money (500*.10) 50
Liabilities
Mobilization advance (5,000x10%) = 400
(500-100)
Running finance 1,000

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Extract of statement of comprehensive income
Rs. (m) Rs. (m)
Revenue 1,200
Expenses (965)
Profit for the year (980x.24) 235

Workings
W-1 Rs. (000)
Stage of completion
Work certified to date 1,200
Total revenue 5,000 1,200/5,000x100
24%
Cost to date (120+1,350) 1,470
Future cost 2,550
Total cost 4,020
Expected profit (5,000- 980
3,900)
A-11
a)
Quality Works Limited
Extracts from statements of financial position
As at June 30, 2014
2014 2013
Rs. (m) Rs. (m)
Assets
Gross amount due from customers 103.00 255.50
Accounts receivable (net of 10% advance payment and
deduction of 5% retention money) (100x85%), (75x85%) 85.00 63.75
Retention money held by customers (3,000x80%x5%),
(3,000x45%x5%) 120.00 67.50

Liabilities
Advance from customers (3,000x20%x10%), (3,000x55%x10%) 60.00 165.00
b)
Quality Works Limited
Extracts from statement of comprehensive income
For the year ended June 30, 2014
Contract revenue recognized (3,000x80%-1,350), (3,000x45%) 1,050.00 1,350.00
Contract cost recognized (1,212.50) (1,237.50)
162.50 112.50
W-1 Expected profit / (loss) on completion of contract
Contract price A 3,000.00 3,000.00
Work completed up to 30 June 2014 B 80% 45%
Accumulated cost incurred 2,560.00 1,500.00
Cost of quotation before award of contract (7.00) (7.00)
Accumulated cost incurred C 2,553.00 1,493.00
Estimated further cost to incur (Balancing) 347.00 1,107.00
Estimated cost to complete 2,900.00 2,600.00
Estimated cost of warranty works at 5% (3,000x5%) 150.00 150.00
Estimated cost of the contract D 3,050.00 2,750.00

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 Estimated profit /(loss) on completion
of the contract (A-D) (50.00) 250.00

W-2 Contract cost recognized for the year ended June 30,
2013 and 2014 2014 2013
Cost recognized up to end of the year DxB 2,44.00 1,237.50
Cost recognized up to June 30, 2013 (1,237.50) --
1,202.50 1,237.50
Loss to be recognized (50x20%) 10.00 --
1,212.50 1,237.50
W-3 Gross amount due from customers
Contract cost incurred up to end of the year C 2,553.00 1,493.00
Recognized profit / (loss) (50x100%), (250x45%) (50.00) 112.50
2,503.00 1,605.50
Progress billings up to end of the year AxB (2,400.00) (1,350.00)
Gross amount due from customers 103.00 255.50

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