AS -7 = CONSTRUCTION CONTRACTS
2009-NOV.
Explain contract costs as per Accounting Standard-7 related to 'Construction Contracts'. (2 marks)
Answer:
According to AS 7 "Construction Contracts (revised 2002)", contract cost should comprise:
1. Costs that relate directly to the specific contract;
2. Costs that are attributable to contract activity in general and can be allocated to the contract; 3. Other costs as are specifically chargeable to the customer under the terms of the contract.
2010-NOV
Answer the following:
An amount of rs 9,90,000 was incurred on a contract work upto 31-3-2010. Certificates have been received to date to the value of Rs 12,00,000 against which Rs 10,80,000 has been received in cash. The cost of work done but not certified amounted to Rs 22,500. It is estimated that by spending an additional amount of 60,000 (including provision for contingencies) the work can be completed in all respects in another two months. The agreed contract price of work is Rs 12,50,000. Compute a conservative estimate of the profit to be taken to the Profit and Loss Account as per AS-7.
Answer:
Computation of Estimated Profit as per AS 7
Particulars
Expenditure incurred upto 31.3.2010
Estimated additional expenses (including provision for contingency) Estimated cost (A)
Contract price (B)
Total estimated profit [(B-A)]
Percentage of completion (9,90,000/10,50,000) x 100
Computation of estimate of the profit to be taken to Profit and Loss Account: = Total estimated profit x Expenses incurred till 31.3.2010
Total estimated cost = 2,00,000 X 9,90,000/ 10,50,000 = 1,88,571
Rs. 9,90,000
60,000 10,50,000
12,50,000 2,00,000
94.29%
Provision:
According to AS-7, 'Construction Contracts', when the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to stage of completion of the contract activity at the reporting date.
Analysis and Conclusion:
Therefore estimated profit amounting 1,88,571 should be recognized as revenue in the statement of profit and loss.
2011-NOV
Answer the following:
From the following data, show. Profit and Loss A/c (Extract) as would appear in the books of a contractor following Accounting Standard -7:
(in lakhs) 480.00 300.00 200.00
500
( Rs in lakhs) Total foreseeable loss (500 - 480) 20
Contract Price (fixed)
Cost incurred to date
Estimated cost to complete
Answer:
Calculation of Estimated Total Cost
Particulars
Cost incurred to date
Estimate of cost completion
Estimated total cost in completing the contract
Percentage of completion (300/500) x 100 = 60%
Revenue recognised as a percentage to contract price = 60% of 480 lakhs = Rs 288 lakhs
As per para 35 of AS 7 'Construction Contracts', when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. Accordingly, expenses to be recognized in the Profit and Loss Account will be
Less: Loss for the current year (300 - 288) (12) Expected loss to be recognized immediately as per para 35 of AS 7 8 Profit and Loss A/c (An Extract)
( Rs in lakhs) 300
200
(Rs in lakhs)
(Rs lakhs)
in
To Construction cost
To Estimated loss on completion of contract
300 8
By Contract price
288
2012-MAY
??
M/s Excellent Construction Company Limited undertook a contract to construct a building for Rs 3 Crore on 1st September, 2011. On 31st March, 2012 the company found that it had already spent Rs 1 Crore 80 Lakhs on the construction. Prudent estimate of additional cost for completion was Rs 1 Crore 40 Lakhs. What amount should be charged, to revenue in the final accounts for the year ended on 31st March, 2012, as per the provisions of Accounting Standard 7 "Construction Contracts (Revised)"?
Answer:
Computation of Estimated Cost of Construction:
Particulars Rs in crores
Cost of construction incurred till date Add: Estimated future cost
Total estimated cost of construction
1.80 1.40 3.20
Percentage of completion of contract till date to total estimated cost of construction = (1.80/3.20) x 100 = 56.25%
Proportion of total contract price considered as revenue as per AS 7 (Revised)
= Contract price x percentage of completion = 3 crores x 56.25% = Rs 1.6875 crores
2014-MAY
M/s. Highway Constructions undertook the construction of a highway on 01.04.2013. The contract was to be completed in 2 years. The contract price was estimated at Rs 150 crores. Up to 31.03.2014 the company incurred Rs 120 crores on the construction. The engineers involved in the project estimated that a further Rs 45 crores would be incurred for
completing the work.
What amount should be charged to revenue for the year 2013-14 as per the provisions of Accounting Standard 7 "Construction Contracts"? Show the extract of the Profit & Loss A/c in the books of M/s. Highway Constructions.
Answer:
Statement showing the amount to be charged to Revenue as per AS 7
Cost of construction incurred upto 31.03.2014 Add: Estimated future cost
Total estimated cost of construction
Degree of completion (120/165x100) Revenue recognized (72.73% of 150)
Total foreseeable loss (165-150)
Less: Loss for the current year (120-109) Loss to be provided for
Rs in crores 120
45
4
Rs in crores 109
15
124
165
72.73%
109 (approx) 15
11
Profit and Loss Account (Extract) Rs in crores
To Construction Costs To Provision for loss
2015-MAY
120 4 124
By Contract Price By Net loss
A construction contractor has a fixed price contract for Rs 9,000 lacs to build a bridge in 3 years time frame. A summary of some of the financial data is as under:
Initial Amount for revenue agreed in contract Variation in Revenue (+)
Contracts costs incurred up to the reporting date Estimated profit for whole contract
(Amount Rs in lacs)
Year 1 Year 2 Year 3 9,000 9,000 9,000
- 200 200
2093 6168* 8100** 950 1,000 1,000
*Includes Rs 100 lacs for standard materials stored at the site to be used in year 3 to complete the work. **Excludes Rs 100 lacs for standard material brought forward from year 2.
The variation in cost and revenue in year 2 has been approved by customer.
Compute year wise amount of revenue, expenses, contract cost to complete and profit or loss to be recognized in the Statement of Profit and Loss as per AS-7 (revised).
Answer:
The amounts of revenue, expenses and profit recognized in the statement of profit and loss in three years are shown below:
Upto the reporting
date
Recognized in prior years
Recognized in current year
Year 1
Revenue (9,000 x 26%) Expenses (8,050 x 26%)
2,340 2,093
- -
2,340 2,093
Profit
Profit
Profit
Working Note:
247 -
740 247
1,000 740
247
493
260
Year 2 Year 3
Year 2
Revenue (9,200 x 74%) Expenses (8,200 x 74%)
6,808 6,068
2,340 2,093
4,468 3,975
Year 3
Revenue ( 9,200 *100%) Expenses ( 8,200* 100%)
9,200 8,200
6,808 6,068
2,392 2,132
2016-MAY
Year 1
Revenue after consider variations
Less: Estimated profit for whole contract Estimated total cost of the contract (A)
Actual cost incurred upto the reporting date (B)
Degree of completion (B/A)
9,000 950 8050 2093
26%
9200 1000 8200 6068 6168-100 74%
9200 1000 8200 8200 8100+100 100%
Uday Constructions undertake to construct a bridge for the Government of Uttar Pradesh. The construction commenced during the financial year ending 31.03.2016 and is likely to be completed by the next financial year.
The contract is for a fixed price of Rs 12 crores with an escalation clause.
The costs to complete the whole contract are estimated at Rs 9.50 crores of rupees. You are given the following information for the year ended 31.03.2016:
Cost incurred upto 31.03.2016 Rs 4 crores
Cost estimated to complete the contract Rs 6 crores
Escalation in cost by 5% and accordingly the contract price is increased by 5%.
You are required to ascertain the state of completion and state the revenue and profit to be recognized for the year as per AS-7.
Answer:
Cost of construction of bridge incurred 31.3.16 Add: Estimated future cost
Total estimated cost of construction
Contract Price (12 crore x 1.05)
Stage of completion
Percentage of completion till date to total estimated cost of construction
Rs in crore 4.00
6.00 10.00
= (4/10)x100 = 40%
Revenue and Profit to be recognized for the year ended 31st March, 2016 as per AS-7
Proportion of total contract value recognized as revenue = Contract price x percentage of completion = 12.60 crore x 40% = Rs 5.04 crore
Profit for the year ended 31st March, 2016 = Rs 5.04 crore less Rs 4 crore = Rs 1.04 crore.
2016-NOV
GTI Ltd. negotiates with Bharat Oil Corporation Ltd. (BOCL), for construction of "Retail Petrol and Diesel Outlet Stations". Based on proposals submitted to different Regional Offices of BOCL, the final approval for one outlet each in Region X, Region Y, Region Z is awarded to GTI Ltd. A single agreement is entered into between two. The agreement lays down values for each of the three outlets i.e. Rs 102 Lakhs, Rs 150 Lakhs, Rs 130 Lakhs for Region X, Region Y, Region Z respectively.
Agreement also lays down completion time for each Region.
Comment whether GTI Ltd. will treat it as single contract or three separate contracts with reference to AS-7? Answer:
Provision:
As per AS-7 'Construction Contracts' when a contract covers a number of assets, the construction of each asset should be treated as a separate
contract when:
2. 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
3. the costs and revenues of each asset can be identified.
Analysis:
In the given case, GTI Ltd. negotiates with Bharat Oil Corporation Ltd.
Separate proposal is submitted for each construction, though a single agreement is entered between the two. Also values for each contract is defined separately such as 102 Lakhs, 150 Lakhs and 130 Lakhs for Region X, Region Y and Region Z respectively.
Conclusion:
Thus, GTI Ltd. is required to treat construction of each unit as a separate construction contract. Therefore, three separate contract accounts must be recorded and maintained in the books of GTI Ltd. For each contract principles of revenue and cost recognition must be applied separately and net income will be determined for each asset as per AS-7.
12.60 crore
2017-MAY
Akar Ltd. signed on 01/04/16, a construction contract for Rs 1,50,000
Following particulars are extracted in respect of contract, for the period ending 31/03/17.
Materials issued Rs 75,00,000
Labour charges paid Rs 36,00,000.
Hire charges of plant Rs 10,00,000
Other contract cost incurred Rs 15,00,000
Out of material issued, material lying unused at the end of period is Rs 4,00,000
Labour charges of Rs 2,00,000 are still outstanding on 31.3.17.
It is estimated that by spending further Rs 33,50,000 the work can be completed in all respect.
You are required to compute profit/loss to be taken to Profit and Loss Account and additional provision for foreseeable loss as per AS-7.
Answer:
Computation of Amount to be charged to P & L and additional Provision (As per AS-7)
Particulars Amount (Rs)
Working Note:
1. Cost of Construction incurred upto 31.03.17
Particulars
2018-MAY
Sarita Construction Co. obtained a contract for construction of a dam. The following details are available in records of company for the year ended 31st March, 2018:
Cost of construction incurred upto 31.03.17 (W. N.-1) Add: Estimated Future cost
Total Estimated cost of construction
1,34,00,000 33,50,000 16,75,000
Degree of Completion ( 13,40,000/1,67,50,000)*100 Revenue Recognized (1,50,00,000 × 80%)
Total Foreseeable loss (1,67,50,000 -1,50,00,000)
Less: Loss of Current Year (1,34,00,000-1,20,00,000) Additional Provision for Foreseeable loss
80% 1,20,00,000 17,50,000 (14,00,000) 3,50,000
Material Issued
(-) Unused Material
Labour Charges Paid + Outstanding
Hire Charges of Plant Other Contract Cost
75,00,000 (4,00,000) 36,00,000 2,00,000
71,00,000
38,00,000 10,00,000 15,00,000 1,34,00,000
Total Contract Price
Work Certified
Work not certified
Estimated further cost to completion Progress payment received
Progress payment to be received
Rs in lakhs 12,000 6,250 1,250
8,750 5,500
1,500
Applying the provisions of Accounting Standard 7 "Accounting for Construction Contracts" you are required to compute:
(i) Profit/Loss for the year ended 31st March, 2018.
(ii) Contract work in progress as at end of financial year 2017-18.
(iii) Revenue to be recognized out of the total contract value. (iv) Amount due from / to customers as at the year end. Answer:
(i) Profit/Loss for the year ended 31st March, 2018.
Particulars
Total Cost of Construction (6,250 +1,250 +8,750)
Less: Total Contract Price
Total Foreseeable loss to be recognised as expense
According to AS-7, when it is probable that total contract costs will expected loss should be recognized as an expense immediately.
(ii) Contract work in progress as at end of financial Year 2017-18.
Particulars Work Certified
Work not Certified
This is 46.15% (7,500/16,250 x 100) of total costs of construction. (iii) Revenue to be recognised out of the total contract value 46.15% of 12,000 Lakhs = 5,538 Lakhs.
(iv) Amount due from / to customers as at the year end
(Rs In Lakhs) 16,250
(12,000)
4,250
exceed total contract revenue, the
(Rs In lakhs) 6,250
1,250 7,500
Amount due from / to customers= (Contract Costs + Recognised Profits Losses) - (Progress Payments Received + Progress
Payments to be Received)
= (7,500+ Nil -4,250) - (5,500 + 1,500) in Lakhs
= [3,250-7,000]Rs in Lakhs
Amount due to customers = 3,750 lakhs
The amount of Rs 3,750 Lakhs will be shown in the balance sheet as liability.
2019-MAY
Answer the following questions :
(i) AP Ltd., a construction contractor, undertakes the construction of commercial complex for Kay Ltd. AP Ltd. submitted separate proposals for each of 3 units of commercial complex. A single agreement is entered into between the two parties. The agreement lays down the value of each of the 3 units, i.e. 50 Lakh, 60 Lakh and 75 Lakh respectively. Agreement also lays down the completion time for each unit.
Comment, with reference to AS-7, whether AP Ltd., should treat it as a single contract or three separate contracts.
(ii) On 1st December, 2017, GR Construction Co. Ltd. undertook a contract to construct a building for 45 lakhs. On 31st March, 2018, the company found that it had already spent 32.50 lakhs on the construction. Additional
cost of completion is estimated at 15.10 lakhs. What amount should be charged to revenue in the final accounts for the year ended 31st March, 2018 as per provisions of AS-7?
ANS
(i) As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the construction of each asset should 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.
Therefore, Mr. AP Ltd. is required to treat construction of each unit as a separate construction contract as the above-mentioned conditions of AS 7 are fulfilled in the given case.
(ii)
` in lakhs
Cost of construction incurred till date Add: Estimated future cost
Total estimated cost of construction
32.50 15.10 47.60
Percentage of completion till date to total estimated cost of construction
=(32.50/47.60) 100=68.28%
Proportion of total contract value recognised as revenue for the year ended 31st March, 2018 per AS 7 (Revised)
= Contract price x percentage of completion
= ` 45 lakh x 68.28% = ` 30.73 lakhs.
Total cost of construction 47.60 Less: Total contract price (45.00) Total foreseeable loss to be recognized as 2.60 expense
According to of AS 7, when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized as an expense immediately.
JULY 2021
The following data is provided for M/s. Raj Construction Co.
(i) Contract Price - ` 85 lakhs
(ii) Materials issued - ` 21 Lakhs out of which Materials costing ` 4 Lakhs is still lying unused at the end of the period.
(iii) Labour Expenses for workers engaged at site - ` 16 Lakhs (out of which ` 1 Lakh is still unpaid)
(iv) Specific Contract Costs - ` 5 Lakhs
(v) Sub-Contract Costs for work executed - ` 7 Lakhs, Advances paid to sub-contractors- ` 4 Lakhs
(vi) Further Cost estimated to be incurred to complete the contract - ` 35 Lakhs
(` in lakhs)
You are required to compute the Percentage of Completion, the Contract Revenue and Cost to be recognized as per AS-7.
ANS.
Computation of contract cost
Material cost incurred on the contract (net of closing21-4 17 stock)
` Lakh
` Lakh
Add: Labour cost incurred on the contract (including outstanding amount)
Specified contract cost
Sub-contract cost (advances should not be considered)
Cost incurred (till date)
Add: further cost to be incurred Total contract cost
16
given 5 7
45 35
80
Percentage of completion = Cost incurred till date/Estimated total cost
= ` 45,00,000/` 80,00,000
= 56.25%
Contract revenue and costs to be recognized Contract revenue (` 85,00,000x56.25%) = ` 47,81,250 Contract costs = ` 45,00,000
MAY 2022
Grace Ltd., a firm of contractors provided the following information in respect of a contract for the year ended on 31st March,2022:
Particulars
(` in ‘000)
Fixed Price Contract with an escalation clause Work Certified Work not Certified (includes ` 26,25,000 for materials issued, out of which material lying unused at the end of the period is ` 1,40,000) Estimated further cost to completion
Progress Payment Received Payment to be Received
Escalation in cost is by 8% and accordingly the contract price is increased by 8%
35,000 17,500 3,815
17,325 14,000 4,900
From the above information, you are required to:
1. Compute the contract revenue to be recognized.
2. Calculate Profit /Loss for the year ended 31st March,2022 and additional provision for loss to be made, if any, for the year ended 31st March,2022.
ANS
Calculation of total estimated cost of construction
` in thousand
Cost of Contract incurred till date
Work certified 17,500 Work not certified (3,815 thousand – 140 3,675 thousand)
Add: Estimated future cost
Total estimated cost of construction
Contract Price (35,000 thousand x 1.08)
21,175
17,325 38,500 37,800
Stage of completion
Percentage of completion till date to total estimated cost of construction = [Cost of work completed till date / total estimated cost of the contract] x 100
= [` 21,175 thousand / ` 38,500 thousand] x 100= 55%
Revenue to be recognized for the year ended 31stMarch, 2022
Proportion of total contract value recognized as revenue = Contract price x percentage of completion = ` 37,800 thousand x 55% = ` 20,790 thousand
Loss to be recognized for the year ended 31stMarch, 2022
Loss for the year ended 31stMarch, 2022 = Cost incurred till date – Revenue to be recognized for the year ended 31st March, 2022
= ` 21,175 thousand – ` 20,790 thousand = ` 385 thousand
Provision for loss to be made at the end of 31stMarch, 2022
` in thousand
Total estimated loss on the contract
Total estimated cost of the contract
Less: Total revised contract price
Less: Loss recognized for the year ended 31st March, 2022
Provision for loss to be made at the end of 31stMarch, 2022
RTP QUESTIONS
38,500 (37,800) 700
(385) 315
RTP
X Undertook a Contract for 15,00,000 on an arrangement that 80% of the value of work done as certified by the architect of the Contractee, should be paid immediately and that the remaining 20% be retained until the Contract was completed.
In Year 1, the amounts expended were 3,60,000, the work was certified for 3,00,000 and 80% of this was paid as agreed. It was estimated that future expenditure to complete the Contract would be 10,00,000.
In Year 2, the amounts expended were 4,75,000. Three-fourths of the Contract was certified as done by December 31st and 80% of this was received accordingly. It was estimated that future expenditure to complete the Contract would be 4,00,000
In Year 3, the amounts expended were 3,10,000 and on June 30th the whole Contract was completed.
Show how Contract Revenue would be recognised in the P&L A/c each year.
Answer:
PARTICULARS
1. Contract Price
2. Cost Incurred till date
3. Add: Costs Expected
4. Expected Total Contract Cost 5. % of Completion
= Cost Till Date/ Total Contract Costs 6. Total Contract Revenue
7. Contract Revenue to be recognised
= Total Revenue x % of Completion 8. Contract Costs
9. Profit
RTP
Year 1 15,00,000 3,60,000 10,00,000 13,60,000 26.47%
1500000 3,97,050
3,60,000 37,050
Year 2 15,00,000 8,35,000 4,00,000 12,35,000 67.61%
15,00,000 10,14,150
8,35,000 179,150
Year 3 15,00,000 11,45,000 - 11,45,000 100%
15,00,000 15,00,000
11,45,000 3,55,000
XYZ & Co. a Firm of Contractors, obtained a Contract for Construction of bridges across the river Revathi. The following details are available in the records kept for the year ending 31st March. (information in Lakhs)
Total Contract Price 1,000 Progress Payment Received 400
Costs incurred till date 605 Progress Payment to be Received 140
Estimated further Cost to Completion 495
The Firm seeks your advice and assistance in the presentation of accounts keeping in view the requirements of AS - 7
Answer:
Percentage of Completion = Cost Incurred Till Date/ Estimated Total Costs = Rs 605/Rs 1,100 = 55%
Total Expected Loss to be provided for, as per Para 35 = Contract Price (-) Total Costs = 100 Lakhs.
Contract Revenue as per Para 21 = 55% of 1,000 Lakhs
Less: Contract Costs as per Para 21
Loss on Contract
Less: Further provision required in respect of Expected Loss = 45 Lakhs (Bal. Figure)
Expected Loss recognised as per Para 35 = 100 Lakhs
Amount due from/to customers = Contract Costs + Recognised Profits (-) Recognised Losses (-) Progress Billings
= 605 + Nil (-) 100 (-) 540 = (35) Lakhs
Amount Due to Customers.
This amount of Rs 35 Lakhs will be shown in the Balance Sheet as a Liability.
Note: Progress Billings = Payments Received + Payments billed but not received.
RTP
XYZ Construction Co. Ltd. undertook a contract on 1st January to construct a building for Rs 80 Lakhs. The Company found on 31st March that it had already spent Rs 58,50,000 on the construction. Prudent estimate of additional cost for completion was Rs 31,50,000.
What amount should be charged to Revenue and what amount of Contract Value to be recognized as Turnover in the accounts for the year ended 31st March as per provisions of AS-7?
= 550 Lakhs = 605 Lakhs
= 55 Lakhs
Answer:
Estimated Total Contract Costs = Cost till date + Further Costs = Rs 58,50,000 + Rs 31,50,000 = Rs 90,00,000 Percentage of Completion: = Cost Incurred Till Date/ Estimated Total Costs = Rs 58.50/ Rs 90.00 = 65% Total Expected Loss to be provided for = Contract Price (-) Total Costs =
Rs 80 (-) Rs 90 = Rs 10,00,000.
Contract Revenue as per Para 21 = 60% of Rs 80 Lakhs = Rs 52,00,000
(Contract Revenue to be recognized)
Percentage of completion = Cost Till Date/ Estimated Total Costs = 300/500 = 60% Total Expected Loss to be provided for, as per Para 35 = Contract Price
- Total Costs = 480-500 = 20 Lakhs
Contract Revenue as per Para 21 = 60% of 480 Lakhs
= 288 Lakhs (Contract Revenue to be recognized)
Less: Contract Costs as per Para 21 = 300 Lakhs (Contract Expenses to be recognized)
= 12 Lakhs
Loss on Contract
Less: Further provision required in respect of expected loss= 8 Lakhs (Bal. Figure) Expected Loss recognised as per Para 35 = = 20 Lakhs (Loss on Contract to be recognized)
MAY 2021
(A) Sky Limited belongs to Heavy Engineering Contractors specializing in construction of Flyovers. The company just entered into a contract with a local municipal corporation for building a flyover. No activity has started on this contract.
As per the terms of the contract, Sky Limited will receive an additional ` 50 lakhs if the construction of the flyover were to be finished within a period of two years from the commencement of the contract. The Accountant of the entity wants to recognize this revenue since in the past the company has been able to meet similar targets very easily. Give your opinion on this treatment.
(b) ABC Ltd., a construction contractor, undertakes the construction of commercial complex for XYZ Ltd. ABC Ltd. submitted separate proposals for each of 3 units of commercial complex. A single agreement is entered into between the two parties. The agreement lays down the value of each of the 3 units i .e. ` 50 lakh, ` 60 lakh and ` 75 lakh respectively. Agreement also lays down the completion time for each unit.
Comment, with reference to AS 7, whether ABC Ltd., should treat it as a single contract or three separate contracts.
ANS
(A) According to AS 7 ‘Construction Contracts’, incentive payments are additional amounts payable 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 both the conditions are met:
1. the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded; and
2. the amount of the incentive payment can be measured reliably.
In the given problem, the contract has not even begun and hence the contractor (Sky Limited) should not recognize any revenue of this contract. Therefore, the accountant’s contention for recognizing ` 50 lakhs as revenue is not correct
(B) As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the construction of each asset should be treated as a separate construction contract when:
1. separate proposals have been submitted for each asset;
2. 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
3. the costs and revenues of each asset can be identified.
ABC Ltd. has submitted separate proposals for each of the 3 units of commercial complex. Also the revenue
and completion time has been laid down for each unit separately which implies separate negotiation for them. Therefore, ABC Ltd. is required to treat construction of each unit as a separate construction contract as the above-mentioned conditions of AS 7 are fulfilled in the given case.
NOV 2021
(a) In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably only when certain conditions prescribed under AS 7 are satisfied. You are required to describe these conditions mentioned in the standard.
(b) Mr. ‘X’ as a contractor has just entered into a contract with a local municipal body for building a flyover. As per the contract terms, ‘X’ will receive an additional ` 2 crore if the construction of the flyover were to be finished within a period of two years of the commencement of the contract. Mr. X wants to recognize this revenue since in the past he has been able to meet similar targets very easily. Is X correct in his proposal? Discuss.
ANS
(A) In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied:
1. total contract revenue can be measured reliably;
2. it is probable that the economic benefits associated with the contract will flow to the enterprise;
3. both the contract costs to complete the contract and the stage of contract completion at the reporting date can be measured reliably; and
4. 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.
(B) According to AS 7 (Revised) ‘Construction Contracts’, incentive payments are additional amounts payable 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: (i) the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded; and (ii) the amount of the incentive payment can be measured reliably. In the given problem, the contract has not even begun and hence the contractor (Mr. X) should not recognize any revenue of this contract.
MAY 2022
B Ltd. undertook a construction contract for ` 50 crores in April, 2020. The cost of construction was initially estimated at ` 35 crores. The contract is to be completed in 3 years. While executing the contract, the company estimated that the cost of completion of the contract would be ` 53 crores.
Can the company provide for the expected loss in the financial Statements for the year ended 31st March, 2021? Explain.
ANS.
As per para 35 of AS 7 “Construction Contracts”, when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized as an expense immediately. Therefore, the foreseeable loss of ` 3 crores (` 53 crores less ` 50 crores) should be recognized as an expense immediately in the year ended 31st March, 2021. The amount of loss is determined irrespective of
1. Whether or not work has commenced on the contract;
2. Stage of completion of contract activity; or
3. The amount of profits expected to arise on other contracts which are not treated as a single construction contract in accordance provisions of AS 7.
NOV 2022
On 1st December, 2020, “Sampath” Construction Limited undertook a contract to construct a building for ` 108 lakhs. On 31st March, 2021 the company found that it had already spent ` 83.99 lakhs on the construction. A prudent estimate of additional cost for completion was ` 36.01 lakhs.
You are required to compute the amount of provision for foreseeable loss, which must be made in the Final Accounts for the year ended 31st March, 2021 based on AS 7 “Accounting for Construction Contracts.”
ANS.
Calculation of foreseeable loss for the year ended 31st March, 2021 (as per AS 7 “Construction Contracts”)
(` in lakhs)
Cost incurred till 31st March, 2021
Prudent estimate of additional cost for completion Total cost of construction
Less: Contract price
Foreseeable loss
83.99 36.01 120.00
(108.00) 12.00
According to AS 7 (Revised 2002) “Construction Contracts”, when it is probable that total contract costs will exceed total contract revenue; the expected loss should be recognized as an expense immediately. Therefore, amount of `12 lakhs is required to be provided for in the books of Sampath Construction Ltd. for the year ended 31st March, 2021.