The stage of completion of a contract may be determined 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:

         the proportion that contract costs incurred for work performed to date

bear to the estimated total contract costs;

         surveys of work performed; or

         completion of a physical proportion of the contract work.

Progress payments and advances received from customers often do not reflect the work performed.

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:

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.

              When the outcome of a construction contract cannot be estimated

reliably:

         revenue shall be recognised only to the extent of contract costs

incurred that it is probable will be recoverable; and

         contract costs shall be recognised as an expense in the period in

which they are incurred.

An expected loss on the construction contract shall be recognised as an expense immediately in accordance with paragraph 36.

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 being 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:

that are not fully enforceable, ie their validity is seriously in question;

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 unable 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

              When it is probable that total contract costs will exceed total contract

revenue, the expected loss shall be recognised as an expense immediately.

              The amount of such a loss is determined irrespective of:

          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

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 the amount of revenue and expenses recognised in profit or loss in the period in which the change is made and in subsequent periods.

Disclosure

              An entity shall disclose:

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.

              An entity shall disclose each of the following for contracts in progress at

the end of the reporting period:

         the aggregate amount of costs incurred and recognised profits

(less recognised losses) to date;

         the amount of retentions.

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 not they have been paid by the customer. Advances are amounts received by the contractor before the related work is performed.

An entity shall present:

         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.

              The gross amount due from customers for contract work is the net amount of:

         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.

              The gross amount due to customers for contract work is the net amount of:

         costs incurred plus recognised profits; less

         the sum of recognised losses and progress billings

for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses).

An entity discloses any contingent liabilities and contingent assets in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Contingent

liabilities and contingent assets may arise from such items as warranty costs, claims, penalties or possible losses.

Effective date

              This Standard becomes operative for financial statements covering periods

beginning on or after 1 January 1995.

 

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