accounting standards - 07

8/3/2019 Accounting Standards - 07

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ACCOUNTING STANDARD7 AND 31


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ACCOUNTING STANDARDS - 07

CONSTRUCTION CONTRACT

A Construction contract is a contract specifically negotiatedfor the construction of an asset or a combination of assetsthat are closely interrelated or interdependent in terms of their design, technology and function or their ultimatepurpose or use.

Recognition of contract revenue and contractcost

When the outcome of a construction contract can beestimated reliably, contract revenue and contract costshould be recognized as revenue and expenses byreference to the stage of construction. (This accountingstandard recommends the use of percentage of completionmethod).


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When the outcome of a construction contractcannot be estimated reliably,

Revenue should be recognized only to the

extent of contract costs incurred of whichrecovery is probable. (i.e. Revenuerecognized = Costs Incurred )

Contract costs should be recognized as anexpense in the period in which they areincurred


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The outcome of a construction contract can be estimatedreliably when all the following conditions are satisfied:

a) Total contract revenue can be measured reliably;

b) The receipt of revenue is probable;

c) The contract costs to complete the contract can be measuredreliably;

d) The stage of completion at the reporting date can bemeasured reliably;

e) The contract costs attributable to the contract can be clearlyidentified.


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C ontract Revenue should comprise:

the initial amount of revenue agreed in the contract;and

variations in amount to be received

to the extent that it is probable that they will result inrevenue; and

they are capable of being reliably measured.

(Contract can of two kinds: Fixed Price contract andC ost Plus contract)


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C ontract C osts shouldcomprise:

(a) costs that relate directly to thespecific contract;

(b) costs that are attributable tocontract activity in general and can

be allocated to the contract


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When an uncertainty arises about the collectability of an amount already included in contract revenue, andalready recognized in the statement of profit and loss,the uncollectable amount or the amount in respect of which recovery has ceased to be probable is

recognized as an expense rather than an adjustmentof the amount of contract revenue.

Contract costs that relate to future activity, arerecognized as an asset provided it is probable thatthey will be recovered. Such asset is classified as

Contract WIP.


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The stage of completion of a contract may bedetermined by following ways;

surveys of work done

completion of physical proportion of the contract work

the proportion that contract costs incurred for workperformed up to the reporting date bear to theestimated total contract costs.


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When a contract covers a number of assets, theconstruction of each asset should be treated as aseparate construction of each asset should be treatedas separate construction contract when

separate proposals have been submitted for eachasset;

each asset has been subject to separate negotiation

the costs and revenues of each asset can be identified


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The recognition of revenue and expensesin construction contract is based onreliable estimate. This estimate may varyfrom one accounting year to another accounting year. The effect of change inestimate should be treated as per AS -5 .

i.e. It should not be treated as prior perioditem or extraordinary item.


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D isclosure:Contract Revenue recognized as revenue

Method used to determine the contract revenue

Method used to determine the stage of completion

Contract costs incurred + Recognised Profit RecognisedLoss

Amount of advances received

Amount due from customers

Amount due to customers


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ACCOUNTING STANDARD- 31

DEFINITION

A real or virtual document representing a legal agreementinvolving some sort of monetary value. In today's financialmarketplace, financial instruments can be classified generally as

equity based, representing ownership of the asset, or debt based,representing a loan made by an investor to the owner of the asset.Foreign exchange instruments comprise a third, unique type of instrument. Different subcategories of each instrument type exist,such as preferred share equity and common share equity, for example.

Financial instruments can be thought of as easily tradablepackages of capital, each having their own unique characteristicsand structure. The wide array of financial instruments in today'smarketplace allows for the efficient flow of capital amongst theworld investors.


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OBJECTIVES..

The objective of the standard is to establishprinciples for

Presenting Financial Instruments as liabilities or equity

Offsetting Financial assets and FinancialLiabilities

Compound Financial Instruments


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SCOPE AS -31 applies to all Financial Instruments, bothrecognized and unorganized except for -

Interest in subsidiaries, associates, and jointventures accounted for under AS -2 1,Consolidated Financial Statements and

Accounting for Investment in subsidiaries inseparate Financial Statements, AS -2 3,

Accounting for Investment in Associates or AS - 2 7, Financial Reporting of Interest in Joint Ventures.

Employees rights and obligations under employee benefit plans subject to AS - 15 ,Employees Benefits.


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Insurance contracts.

The acquirers contracts for contingentconsideration in a business combination.

Financial Instruments, contracts andobligations under share -based payments.


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THANK YOU!!!!

accounting standards - 07

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