Overview of IAS 11
A construction contract (contract costs) is a contract specifically negotiated for the construction of an asset, or combination of assets, including contracts for the rendering of services directly related to the construction of the asset (such as project managers’ and architects’ services). Such contracts are typically fixed-price or cost-plus contracts.
Revenue and expenses on construction contracts are recognised using the percentage-of-completion method. This means that revenue, expenses and, therefore, profit are recognised gradually as contract activity occurs.
Where the outcome of the contract cannot be estimated reliably, revenue is recognised only to the extent of costs incurred that are recoverable; contract costs are recognised as an expense as incurred. Where it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately as an expense.
IFRIC 15, ‘Agreements for the construction of real estate’, clarifies which standard (IAS 18, ‘Revenue’, or IAS 11, ‘Construction contracts’) should be applied to particular transactions.
Disclosure of IAS 11
- amount of contract revenue recognised; [IAS 11.39(a)]
- method used to determine revenue; [IAS 11.39(b)]
- method used to determine stage of completion; [IAS 11.39(c)] and
- for contracts in progress at balance sheet date: [IAS 11.40]
- aggregate costs incurred and recognised profit
- amount of advances received
- amount of retentions
Presentation of IAS 11
The gross amount due from customers for contract work should be shown as an asset. [IAS 11.42]
The gross amount due to customers for contract work should be shown as a liability. [IAS 11.42]