Lkas11 Construction Contracts
Transcript of Lkas11 Construction Contracts
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Uditha De Zoysa
LKAS 11 ConstructionContracts
rec or,
12 June 2012
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Agenda
Scope and definitions
Segmenting and combining construction contracts
Recognition of contract revenue and costs
IFRIC 15 LKAS 11 Vs LKAS 18
New developments on revenue recognition3
Definition
... a contract specifically negotiated ...
... for the construction of an asset, or a combination of assets ...
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... that are closely interrelated or interdependent in terms of their
design, technology and function or their ultimate purpose or use.
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Type of contr acts
Construction contracts
Fixed price
Contractor and customer agreed a fixed price or
Cost plus
Contractor is reimbursed for allowable or otherwise defined costs, plus
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a percentage of these costs or a fixed fee
Segmenting construction contracts
One contract number of assets
Separate propo sals for each asset?No
No
No
Yes
Yes
Separate negotiatio n / acceptance foreach asset?
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asset?
SEPARATE constru ction contr act for eachasset
One constructioncontract
Yes
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Combining construction contracts
Group of contracts
Negotiated as a singl e package?
Interrelated overall profit margin?
No
No
No
Yes
Yes
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continuous sequence?
SINGLE con tract Separatecontracts
Yes
Add it ion al ass et at cus tomer o pt ion
Separate if:
additional asset differs significantly from the asset(s) covered by the
original contract in: design; technology; or function; or
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price of the additional asset is negotiated without regard to the original
contract price
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Contract revenue
Initial amount
Variations
Contract revenueto be measured at
fair value of theconsideration received or
receivableOnl if :
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Claims
Incentivepayment
- Probable they willresult in revenue; and
- revenue ismeasurable reliably
Revenue Measured at Fair Value
If revenue on a contract is recognized, but will be received only ,
be imputed and expected cash receipt should be discounted todetermine the fair value of the amounts receivable.
Eg: Retention
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Contract costs
Include if: Related directly to specific contract
Exclude if: Cannot be attributed to contract
Attributable to contract activity ingeneral and can be allocated to thecontract
Other specifically chargeable to thecustomer under the contract
Incurred from the date of and inorder to secure the contract only if:
relate directly to contract
ac v y or canno e a oca e o acontract:
general administration costs notreimbursable under the contract
selling costs R&D costs not reimbursable
under the contract depreciation of idle PPE not
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identifiable separately measurable reliably probable that contract will be
obtained not expensed previously
used on a particular contract
Recognition of c ontract revenue and expenses
Outcome can beestimated reliably
Outcome cannot beestimated reliably
Recognise by reference to thestage of completion at the end ofthe reporting period:
contract revenue contract costs
Recognise immediately anyexpected loss as an expense
Recognise revenue only to theextent of incurred contract costswith probable recovery
Recognise contract costs as anexpense as incurred
Recognise immediately anyexpected loss as an expense
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Reliable estimate of outcom e
ALL condit ions should be met:
Fixed price contract
Total contract revenue measurablereliably
Probable that economic benefits will flowto the entity
Cost plus contract
Probable that economic benefits will flowto the entity
Attributable contract costs (whether ornot reimbursable specifically) identifiable
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on rac cos s o comp e e an s a e ocompletion measurable reliably
Attributable contract costs identifiableclearly and measurable reliably: actual vs.estimates
Methods for determining stage of completion
Measures
Output
Surveys of work performed
Completion of a physical
Input
cost incurred to date
total estimate costs %
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NB! No specific method is mandated Progress payments and advances often do NOT reflect work performed
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Recognition of cont ract revenue and expenses Example 1
A enters into a contract to build a road for Rs.90 million. Asinitial estimate of contract costs is Rs.74 million. Thecon rac s ar s ear y n Scenario 1 - At the end of 2010 A can estimate reliably the outcome of the
contract Stage of completion is determined based on the completion of
physical proportion of the contract work Estimated to be 50% physically complete at end of 2010 Cost incurred to date Rs.37 million A reco nises at 31 December 2010:
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revenue of Rs.45 million; and
expenses of Rs.37 million.
Recognition of contract revenue and expenses Example (continued)
Scenario 2 - At the end of 2010 A cannot estimate reliably theoutcome of the contract
Costs incurred Rs.30 million It is probable that the costs will be recovered A recognises at 31 December 2010:
revenue of Rs.30 million; and
expenses of Rs.30 million.
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Percentage of completion method - changes in estimates
Percentage of completion method: application on cumulative basis in each period
to the current estimates of contract revenue
Effect of changes in estimates is accounted for under LKAS 8 - prospectively
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Changes in estimates Example 2
A enters into a contract to build a road for Rs.90 million. Asinitial estimate of contract costs is Rs.74 million. Thecon rac s ar s ear y n
Stage of completion is determined based on the completionof physical proportion of the contract work
Year-end 2009 estimated completed work 50% no changes to estimated costs to complete the work
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ear-en estimated completed work 90% estimated total costs to complete the work Rs.80 million
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Changes in estimates Example (continued)
2009 2010 2011 TotalRs.m Rs.m Rs.m Rs.m
Revenue 45 1 36 3 9 90Costs 37 2 35 4 8 80Profit 8 1 1 10GPM 17.7% 2.8% 11.1% 11.1%
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an ge n es ma esa c u a ons:1. 90x50% = 45
2. 74x50% = 373. 90x90% - 45 = 364. 80x90% - 37 = 35
Expected losses Example 3
A enters into a contract to build a road for Rs.90 million. As initial estimate of contract costs is Rs.74 million. Thecon rac s ar s ear y n
At the end of 2010, the estimated costs to complete the work increase to Rs.95 million, with no increase incontract revenue . A has to recognise the expected loss of Rs.5 million immediately
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Calculation
Total revenue = 90
Total estimated cost = (95)
Estimated loss = 5
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Issues and scope IFRIC 15
Issues addressed by IFRIC 15 Applicable standard (LKAS 11 or
LKAS 18) Timing of revenue recognition
Scope Agreement for the construction of
real estate Component for the construction
of real estate identified within an
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agreement that includes other components
LKAS 11 or LKAS 18?
Is buyer able to specify the major structur alelements of desi n and / ormajor structural changes?
LKAS 11 LKAS 18
YES NO
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NOT an accounting policy choice!!!
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When and how r ecognize revenue?
Construction contract? LKAS 11
NO
Revenue recognition
NO
Stage ofcompletion
Rendering o f servicesonly?
LKAS 18Rendering of servicesYES
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Sale of goods ? criteria met on acontinuous basis?
Uponcompletion
NO
ICASL Ruling on Deferrin g Applicatio n of IFRIC 15
O tion
Defer application of IFRIC Apply IFRIC 15 with t head o t io n o f SL FRS
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comes into effect
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Contracts with Customers ED
A new revenue recognition model that applies to revenue
Single standard would replace: IAS 11 Construction contracts IAS 18 Revenue IFRIC 13 Customer Loyalty Programmes greemen s or e ons ruc on o ea s a e IFRIC 18 Transfers of Assets from Customers
SIC31 Revenue Barter Transactions Involving Advertising Services
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The 5-step model
Step 1: Identify the contract Contract
Step 2: Identify POs in the contract PO
2PO 1
Step 3: Determine the TP TP
for the contract
PO: Performance obligationTP: Transaction price
Step 4: Allocate the TP to POs
TP allocated to PO 2
TP allocated to PO 1
Step 5: Revenue as POs satisfied
Revenue on PO 2
Revenue on PO 1
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Criteria for Recognizing Revenue Over Time
Performancecreate or enhancean asset that the
Performance does not create an asset withalternative use to the entity
an asset that thecustomer controls ustomer
receivebenefits asentity performs
Task wouldnot need tobereperformed
Entity hasthe right topayment forperformance
Performance obligations satisfied over time
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Eg Buildingconstructed on a
customers land andcustomer retains thepartly completedbuilding if thecontract was terminated
Eg Projectmanagements
service
Eg Partlyconstructed
building thatcustomer retainsif contract isterminated early
Eg Milestoneevents have been
achieved
u stions
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Contact details
KPMG.
P.O. Box 186, Colombo 03, Sri Lanka.
Department of Professional Practice DPP
Ms. Uditha de Zoysa +94 (0) 11 5 426 124
Email [email protected]
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Web www.kpmg.com/lk
Thank you.