AS – 7
CONSTRUCTION CONTRACT
Objective:
It is
Accounting for construction contracts in the financial
statements of enterprises undertaking such contracts.
Scope:
This
standard applies to enterprises undertaking construction
activities not as contractors but on their own account as
venture of a commercial nature where the enterprise has entered
into agreements for sale.
Definitions:
Construction contract:
It is a
contract for the
construction of an asset or of a combination of assets which
together constitute a single project.
Types of
contracts:
1.
Fixed price contracts
2.
Cost plus contracts.
measurement principles and methods:
1.
PERCENTAGE OF COMPLETION METHOD
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This
method can be used only if the outcome of the contract can be
reliably estimated.
Normally,
the profit is not recognized in fixed price contracts unless the
work on a contract has progressed to a reasonable extent (20 to
25% of the work).
While
recognizing the profit under this method, an appropriate
allowance for future unforeseeable factors should be made on
either a specific or a percentage basis.
2.
COMPLETED CONTRACT METHOD
In this
method revenue is recognized only when the contract is completed
or substantially completed. Costs and progress payments received
are accumulated during the course of the contract.
Disclosure requirements:
The
following should be disclosed:
1. The
amount of construction work-in-progress
2. Progress
payments received and advances and retentions on account of
contracts
included in construction work-in-progress
3. The
amount receivable in respect of income accrued under cost plus
contracts not included in construction work-in-progress.
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