Accounting STANDARD

The primary objective of accounting standards

is to standardize the diverse accounting
policies and practices.

Accounting standards are mandatory for:

Enterprises whose equity or debt securities are listed on a recognized stock
exchange in India.

Or enterprises whose securities are in the process of being issued and will be listed
on a recognized stock exchange in India.

And for all other enterprises whose turnover for the accounting year is more than Rs
50 cr.

Objective
The objective of this Statement is to prescribe the accounting treatment of revenue and
costs associated with construction contracts. The primary issue in accounting for
construction contracts is the allocation of contract revenue and contract costs to the
accounting periods in which construction work is performed.

This Statement uses the recognition criteria established in the Framework for the
Preparation and Presentation of Financial Statements to determine when contract
revenue and contract costs should be recognised as revenue and expenses in the
statement of profit and loss

A construction contract may be negotiated for the construction of single asset such as
a bridge, building, dam, pipeline, road, ship or tunnel. Construction contract may also
deal with the construction of a number of assets which are closely interrelated or
interdependent in terms of their design, technology and function or their ultimate
purpose or use; examples of such contracts include those for the construction of
refineries and other complex pieces of plant or equipment.

For the purposes of this Statement, construction contracts include:

(a) Contracts for the rendering of services which are directly related to the
construction of the asset, for example, those for the services of project managers and
architects; and
(b) Contracts for destruction or restoration of assets, and the restoration of the
environment following the demolition of assets.

Types of Construction Contracts

Construction contracts are formulated in a variety of ways but generally fall into two
basic types:

(i) Fixed price contracts—the contractor agrees to a fixed contract price, or rate, in
some cases subject to cost escalation clauses;

(ii) Cost plus contracts—the contractor is reimbursed for allowable or otherwise

defined costs, and is also allowed a percentage of these costs or a fixed fee.

Both types of contracts are within the scope of this Statement.

7. Accounting Treatment of Construction Contract Costs and Revenues

7.1 Two methods of accounting for contracts commonly followed by contractors are
the percentage of completion method and the completed contract method.

7.2 Under the percentage of completion method, revenue is recognized as the contract
activity progresses based on the stage of completion reached. The costs incurred in
reaching the stage of completion are matched with this revenue, resulting in the
reporting of results which can be attributed to the proportion of work completed.
Although (as per the principle of 'prudence') revenue is recognized only when
realized, under this method, the revenue is recognized as the activity progresses even
though in certain circumstances it may not be realized.

7.3 Under the completed contract method, revenue is recognized only when the
contract is completed or substantially completed; that is, when only minor work is
expected other than warranty obligation. Costs and progress payments received are
accumulated during the course of the contract but revenue is not recognized until the
contract activity is substantially completed.