Definition Treatment of a contract to last for a period of more than one year.
Recognizing the revenue based on PFRS 15
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when the entity satisfies a performance obligation
Types of construction contract
| Fixed priced contract | Cost-plus contact |
| A contract which the contractor agrees to a fixed price, subject to cost escalation clauses | A contract which the contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of these costs or a fixed fee |
Percentage of completion / Overtime method
-Application of accrual assumption.
-Used when the outcome of the construction contract can be estimated reliably
-This approach avoids the mismatch between cost being recognized as they incurred
–Revenue is recognized when the contract is completed
Measuring earnings process
1.)Input Method
– Cost to Cost Method, the degree of completion is determined by comparing costs already incurred
Formula:
2.) Output Method
Measures are made in terms of results achieved
Point in time
-Used when the outcome cannot be reliably estimated
-Revenue is recognized when the performance obligation is satisfied.
Contract Revenue
Total amount of consideration receivable under the contract. It compromises of:
- Initial amount of revenue agreed
- The variations in contract work and claims
All variation, claim or incentive payments should be probable and reliably measured
Variations – change in the scope of the work to be performed under the contract
Claims – amount that the contractor seeks to collect from the customer or another party as reimbursement for costs not included in the contract price
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