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IFRS amendments to IAS 11

IFRS amendments to IAS 11: The IAS 11 standard of International Accounting Standards sets requirements for the accounting treatment of the revenue and costs associated with long-term construction contracts. By their nature, construction activities and contracts are long-term projects, often beginning and ending in different accounting periods. IAS 11 helps accountants with measuring to what extent costs, revenue and possible profit or loss on the project need to be incurred in which period.

IFRS amendments to IAS 11

IFRS amendments to IAS 11

IFRS amendments to IAS 11: History

This is a timeline of IAS 11

December 1977 Exposure Draft E11 Accounting for Construction Contracts
March 1979 IAS 11 Accounting for Construction Contracts
January 1980 Effective date of IAS 11
May 1992 Exposure Draft E42 Construction Contracts
December 1993 IAS 11 (1993) Construction Contracts (revised as part of the ‘Comparability of Financial Statements’ project)
January 1995 Effective date of IAS 11 (1993)
January 2018 IAS 11 will be superseded by IFRS 15, Revenue from Contracts with Customers [3]

IFRS amendments to IAS 11
Content

How accounting revenue and costs need to be recognized depends first on whether the stage of completion of a project can be reliably measured. If this is the case, cost and revenue (including profit if any) can be recognized up to the percentage of completion during the current accounting period. If the stage of completion of a project cannot be reliably measured, the revenue can only be recognized up to the costs that have been incurred and any profit is only recognized at the end of the last accounting period. In the case a company is expecting to make a loss on the contract, this loss will be immediately recognized in the current accounting period.[4]

IFRS amendments to IAS 11

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The objective of this Standard is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting periods. Therefore, the primary issue in accounting for construction contracts is the allocation of contract revenue and contract coststo the accounting periods in which construction work is performed. This Standard shall be applied in accounting for construction contracts in the financial statements of contractors.

A construction contract is a 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. The requirements of this Standard are usually applied separately to each construction contract.

However, in certain circumstances, it is necessary to apply the Standard to the separately identifiable components of a single contract or to a group of contracts together in order to reflect the substance of a contract or a group of contracts.

IFRS amendments to IAS 11: Contract revenue shall comprise:

  1. the initial amount of revenue agreed in the contract.
  2. variations in contract work, claims and incentive payments:
    1. to the extent that it is probable that they will result in revenue.
    2. they are capable of being reliably measured Contract revenue is measured at the fair value of the consideration received or receivable.

IFRS amendments to IAS 11: COST

(a) costs that relate directly to the specific contract;

(b) costs that are attributable to contract activity in general and can be allocated to the contract; and

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(c) such other costs as are specifically chargeable to the customer under the terms of the contract.

When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period. When the outcome of a construction contract cannot be estimated reliably:

  1. Revenue shall be recognised only to the extent of contract costs incurred that it is probable will be recoverable.
  2. Contract costs shall be recognised as an expense in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognised as an expense immediately.

IFRS amendments to IAS 11

The following terms are used in this Standard with the meanings specified: A construction contract is a 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.

A fixed price contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses. A cost plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of these costs or a fixed fee.

IFRS amendments to IAS 11

The following terms are used in this Standard with the meanings specified: A construction contract is a 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.

A fixed price contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses. A cost plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of these costs or a fixed fee.

IFRS amendments to IAS 11

For the purposes of this Standard, construction contracts include:

  1. Contracts 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.
  2. Contracts for the destruction or restoration of assets, and the restoration of the environment following the demolition of assets.

IFRS amendments to IAS 11

Construction contracts are formulated in a number of ways which, for the purposes of this Standard, are classified as fixed price contracts and cost plus contracts. Some construction contracts may contain characteristics of both a fixed price contract and a cost plus contract, for example in the case of a cost plus.

IFRS amendments to IAS 11

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