International Accounting Standard 11
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 11 Construction Contracts, which had originally been issued by the International Accounting Standards Committee in December 1993. IAS 11 Construction Contracts replaced parts of IAS 11 Accounting for Construction Contracts (issued in March 1979).
INTERNATIONAL ACCOUNTING STANDARD 11
COMBINING AND SEGMENTING CONSTRUCTION CONTRACTS
RECOGNITION OF CONTRACT REVENUE AND EXPENSES
RECOGNITION OF EXPECTED LOSSES
CHANGES IN ESTIMATES
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
Disclosure of accounting policies
The determination of contract revenue and expenses
International Accounting Standard 11 Construction Contracts (IAS 11) is set out in paragraphs 1-46. 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 context of its objective, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
International Accounting Standard 11
The objective of this Standard is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods. Therefore, the primary issue in accounting for construction contracts is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. This Standard uses the recognition criteria established in the Framework for the Preparation and Presentation of Financial Statements1 to determine
when contract revenue and contract costs should be recognised as revenue and expenses in the statement of comprehensive income. It also provides practical guidance on the application of these criteria.
This Standard shall be applied in accounting for construction contracts
in the financial statements of contractors.
This Standard supersedes IAS 11 Accounting for Construction Contracts approved in
The following terms are used in this Standard with the meanings
A construction contract is a contract specifically negotiated for the
construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.
A fixed price contractis a construction contract in which the contractor
agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses.
A 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 fee.
A construction contract may be negotiated for the construction of a single asset
such as a bridge, building, dam, pipeline, road, ship or tunnel. A construction contract may also deal with the construction of a number of assets which are
IASC's 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.
closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use; examples of such contracts include those for the construction of refineries and other complex pieces of plant or equipment.
For the purposes of this Standard, construction contracts include:
contracts for the rendering of services which are 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 following the demolition of assets.
Construction contracts are formulated in a number of ways which, for the
purposes of this Standard, are classified as fixed price contracts and cost plus 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 agreed maximum price. In such circumstances, a contractor needs to consider all the conditions in paragraphs 23 and 24 in order to determine when to recognise contract revenue and expenses.
Combining and segmenting construction contracts
The requirements of this Standard are usually applied separately to each
construction contract. However, in certain circumstances, it is necessary to apply the Standard to the separately identifiable components of a single contract or to a group of contracts together in order to reflect the substance of a contract or a group of contracts.
When a contract covers a number of assets, the construction of each asset
shall be treated as a separate construction contract when:
separate proposals have been submitted for each asset;
each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that
part of the contract relating to each asset; and
the costs and revenues of each asset can be identified.
A group of contracts, whether with a single customer or with several
customers, shall be treated as a single construction contract when:
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 margin; and
the contracts are performed concurrently or in a continuous
A contract may provide for the construction of an additional asset at the
option of the customer or may be amended to include the construction of an additional asset. The construction of the additional asset shall be
treated as a separate construction contract when:
the asset differs significantly in design, technology or function
from the asset or assets covered by the original contract; or
the price of the asset is negotiated without regard to the original
Contract revenue shall comprise:
the initial amount of revenue agreed in the contract; and
variations in contract work, claims and incentive payments:
to the extent that it is probable that they will result in
they are capable of being reliably measured.
Contract revenue is measured at the fair value of the consideration received or receivable. The measurement of contract revenue is affected by a variety of uncertainties that depend on the outcome of future events. The estimates often need to be revised as events occur and uncertainties are resolved. Therefore, the amount of contract revenue may increase or decrease from one period to the
next. For example:
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 amount of revenue agreed in a fixed price contract may increase as a
result of cost escalation clauses;
the amount of contract revenue may decrease as a result of penalties arising from delays caused by the contractor in the completion of the
when a fixed price contract involves a fixed price per unit of output,
contract revenue increases as the number of units is increased.
A variation is an instruction by the customer for a change 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 included in contract revenue when:
it is probable that the customer will approve the variation and the
amount of revenue arising from the variation; and
the amount of revenue can be reliably measured.
A claim is an amount that the contractor seeks to collect from the customer or another party as reimbursement for costs not 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 outcome of negotiations.
Therefore, claims are included in contract revenue only when:
negotiations have reached an advanced stage 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
Incentive payments are additional amounts paid to the contractor if specified
performance 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:
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 shall comprise:
costs that relate directly to the specific contract;
costs that are attributable to contract activity in general and can
be allocated to the contract; and
such other costs as are specifically chargeable to the customer under the terms of the contract.
Costs that relate directly to a specific contract include:
site labour costs, including site supervision;
costs of materials used in construction;
depreciation of plant and equipment used on the contract;
costs of moving plant, equipment and materials to and from the contract
costs of hiring plant and equipment;
costs of design and technical assistance that is directly related to the
the estimated costs of rectification and guarantee work, including
expected warranty costs; and
claims from third parties.
These costs may be reduced by any incidental income that is not 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.
Costs that may be attributable to contract activity in general and can be
allocated to specific contracts include:
costs of design and technical assistance that are not directly related to a
specific contract; and
Such costs are allocated using methods that are systematic and rational and are applied consistently to all costs having similar characteristics. The allocation is based on the normal level of construction 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.
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 cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract. Such costs
general administration costs for which reimbursement is not specified in
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.
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 separately identified and measured reliably and it is probable that the contract will be obtained. When costs incurred in securing a contract are recognised 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
When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognised 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 loss on the construction contract shall be recognised as an expense immediately in accordance with paragraph 36.
In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are
total contract revenue can be measured reliably;
it is probable that the economic 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
the 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.
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:
it is probable that the economic benefits associated with the
contract will flow to the entity; and
the contract costs attributable to the contract, whether or not
specifically reimbursable, can be clearly identified and measured reliably.
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. Under 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 recognised as revenue in profit or loss in the accounting periods in which the work is performed. Contract costs are usually recognised 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 total contract costs over total contract revenue for the contract is recognised 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 progress.
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 about 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 generally able to make reliable estimates after it has agreed to a
contract which establishes:
each party's enforceable rights regarding the asset to be constructed;
the consideration to be exchanged; and
the manner and terms of settlement.
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