AS 7 Construction Contract defines and specifies the accounting treatment of revenue and expenditures associated with a construction contract. Construction contracts have to be accounted for in the financial statements of the contractors using Accounting Standard 7 Construction Contract.
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A construction contract is one that is entered into expressly for the building of an asset or a group of assets that are tightly linked or interdependent in terms of technology, design, function, or the nature of its final purpose or use.
A contract in which the contractor and the client agree on a set price for the project. In rare situations, the contract may include a cost escalation provision that is mutually agreed upon by both parties. For example, the parties agree to insert a condition in the contract that allows them to change the contract price if the cost of raw materials rises.
A contract in which the contractor is reimbursed for expenses incurred or agreed upon, as well as a fixed proportion of these expenses.
– Construction Contract Combination – When a group of contracts, either with one or more clients, are negotiated as a single package, are interconnected and constitute part of a single project, and are completed in a continuous sequence, they have termed a single construction contract.
A contract for the construction of three similar structures (in every way) on a single plot, for example, maybe arranged all at once.
– Construction Contract Segmentation – When a contract includes more than one asset, each asset’s construction should be treated as a separate construction contract if separate proposals have been submitted for each asset, each asset has been separately negotiated, and each asset’s costs and revenues can be identified separately.
For example, a contract for the construction of three separate structures on the same site, each with its own set of specifications, is negotiated separately with the contractor.
To the extent that it is likely to generate income and is measurable, contract revenue includes the following:
The following items are included in the cost of a contract:
When the result or outcome of a construction contract may be forecasted, the relevant contract revenue and contract costs must be recognized based on the contract’s current level of completion. Expected losses must be recorded as expenses right away.
I. In the case of a fixed-price contract, the outcome can be reliably estimated if all of the following conditions are met:
1. The whole revenue from a contract can be accurately calculated.
2. It is obvious that the financial benefits of such a contract will accrue to the company.
3. Both contract expenses and contract completion status can be calculated.
4. Contract expenses can be readily defined for a cost comparison with previous estimates
II. When all of the following conditions are met in the case of a cost-plus contract, the outcome can be reliably estimated:
1. The contract’s financial gains are likely to accrue to the organization.
2. The contract costs that are related to the contract can be readily identified and measured.
III. Percentage of completion method – This technique specifies how income and costs are recognized based on the contract’s stage of completion. Revenue and cost are recognized in the profit and loss statement in the accounting periods in which the job is completed using this technique.
IV. Contract work-in-progress costs — A contractor may incur costs related to future contract activity. If it is likely that such costs will be recovered, they are recorded as an asset.
A contract’s state of completion can be determined in a variety of ways. The following approaches may be used, depending on the nature of the contract:
When overall contract costs are likely to exceed total revenue from a contract, the expected losses should be reported as expenses as soon as possible. Regardless of the following, the number of such losses must be determined:
1. An organization should make the following disclosures:
2. At the reporting date, the following disclosures on contracts in progress must also be made:
An organization should exhibit the following:
According to Ind (IAS) 11, | AS 7 specifies |
There is no specific mention of borrowing expenses | In AS 7 borrowing charges are specifically included in expenses. |
Contract revenue must be calculated at the fair market value of the consideration received/receivable. | Contract revenue must be recognized at the fair market value of the consideration received/receivable in AS 7 |
Deals with Service Concession Arrangements, which are agreements between a public and private entity to build, operate, and transfer infrastructure projects. | Service Concession Arrangements are not covered under AS 7 |
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