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ICDS – 3 – Construction Contracts

ICDS – 3 – Construction Contracts

This Income Computation and Disclosure Standard should be applied in determination of income for construction contracts of a contractor.

Definition of Construction Contracts

“Construction contract” is  contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes:

(i) contract 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;

(ii) contract for destruction or restoration of assets, and the restoration of the environment following the demolition of assets.

Contract revenue

Contract revenue shall be recognized when there is reasonable certainty of its ultimate collection. Contract revenue shall comprise of the initial amount of revenue agreed in the contract, including retentions; and variations in contract work claims and inventive payments –

  • to the extent that it is probable that they will result in revenue; and
  • they are capable of being reliably measured.

Subsequent adjustment

Where contract revenue already recognized as income is subsequently written off in the books of account as uncollectible, the same shall be recognized as an expense and not as an adjustment of the amount of contract revenue.

Contract costs

Contract costs shall comprise of –

  • costs that relate directly to the specific contract;
  • costs that are attributable to contract activity in general and can be allocated to the contract;
  • such other costs as are specifically chargeable to the customer under the terms of the contract; and
  • allocated borrowing costs in accordance with the Income Computation and Disclosure Standard on Borrowing Costs.

These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains that is not included in contract revenue.

Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contact.

Recognition of contract revenue and expenses

  • Contract revenue and contract costs associated with the construction contract should be recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date.
  • The recognition of revenue and expenses by reference to the stage of completion of a contract is referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed.
  • The stage of completion of a contract shall be determined with reference to –
  • the proportion that contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs; or
  • surveys of work performed; or
  • completion of a physical proportion of the contract-work.

Progress payments and advances received from customers are not determinative of the stage of completion of a contract.

  • During the early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognised only to the extent of costs incurred. The early stage of a contract shall not extend beyond 25 per cent of the stage of completion.

Changes in estimates

The percentage of completion method is applied on a cumulative basis in each previous year to the current estimates of contract revenue and contract costs. Where there is change in estimates, the changed estimates shall be used in determination of the amount of revenue and expenses in the period in which the change is made and in subsequent periods.


A person shall disclose –

  • the amount of contract revenue recognized as revenue in the period; and
  • the methods used to determine the stage of completion of contracts in progress
  • A person shall disclose the following for contracts in progress at the reporting date, namely –
  • amount of costs incurred and recognized profits (less recognized losses) up to the reporting date;
  • the amount of advances received; and the amount of retentions

ICDS – 3 – Construction Contracts



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