Construction Contracts Archives - Chartered Education

7 Key Points to Study for IAS 11 Construction Contracts

May 5, 2020March 20, 2015 by Pete

When studying IAS 11 Construction Contracts, you can split the topic into seven key areas:

1. Definition of a construction contract

A construction contract is a contract specifically negotiated for the design, manufacture or construction of:

a single asset such as a bridge, building or road, or
a number of related assets. For example, a large factory may have different components

Update: IAS 11 Construction Contracts multiple choice questions

March 19, 2015 by Pete

Are you studying IAS 11 Construction Contracts? Sometimes it can be easier to revise if you ‘do’ rather than just read. Why not try out our multiple choice IAS 11 questions? Click here to access the quiz.

4 Steps to Follow for Fixed Price Construction Contracts in IAS 11

March 12, 2015 by Pete

If the contract is a fixed price and is expected to make a profit; the steps to follow for IAS 11 are as follows:

4 steps to account for loss making contracts for IAS 11

March 12, 2015 by Pete

When you’re studying IAS 11 Construction Contracts, if a loss is expected on the contract, the entire loss should be recognised immediately in the income statement. This is an application of the prudence concept under which anticipated losses are recognised immediately in the income statement.

This is also consistent with the terms of IAS 37 Provisions, Contingent Liabilities and Contingent Assets which requires losses on onerous contracts to be expensed in the period they become probable.

If the stage of completion method is calculated using the cost method, the cost incurred to date is recognised as the contract cost. Also recognise the entire net loss immediately in the income statement. Revenue is then calculated as the difference between the costs incurred and net loss.

If the stage of completion is calculated using the sales basis or physical proportions basis, the revenue is recognised to the work certified as complete. The entire net loss should be recognised immediately and the contract cost is calculated as the difference between revenue and the net loss.

Once this takes place, in the following periods the contract costs and revenue should be the same. This means no further profit or loss will be recorded, so long as estimates remain the same.

Step 1 – Calculate expected loss on contract

Compare the total expected contract costs against the contract value. This will give you an estimate of the expected loss which must be recognised in the period.

Construction Contracts