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TMI BlogConstruction Contracts [Omitted w.e.f. 1st day of April, 2018]X X X X Extracts X X X X X X X X Extracts X X X X ..... contract revenue and contract costs to the accounting periods in which construction work is performed. This Standard uses the recognition criteria established in the Framework for the Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India to determine when contract revenue and contract costs should be recognised as revenue and expenses in the statement of profit and loss. It also provides practical guidance on the application of these criteria. Scope 1. This Standard shall be applied in accounting for construction contracts in the financial statements of contractors. 1A The impairment of any contractual right to receive cash or another financial asset arising from this Standard shall be dealt in accordance with Ind AS 109, Financial Instruments. 2. * Definitions 3. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t; (b) each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset; and (c) the costs and revenues of each asset can be identified. 9. A group of contracts, whether with a single customer or with several customers, shall be treated as a single construction contract when: (a) the group of contracts is negotiated as a single package; (b) the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin; and (c) the contracts are performed concurrently or in a continuous sequence. 10. A contract may provide for the construction of an additional asset at the option of the customer or may be amended to include the construction of an additional asset. The construction of the additional asset shall be treated as a separate construction contract when: (a) the asset differs significantly in design, technology or function from the asset or assets covered by the original contract; or (b) the price of the asset is negotiated without regard to the original contract price. Contract re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly when: (a) negotiations have reached an advanced stage such that it is probable that the customer will accept the claim; and (b) the amount that it is probable will be accepted by the customer can be measured reliably. 15. Incentive payments are additional amounts paid to the contractor if specified performance standards are met or exceeded. For example, a contract may allow for an incentive payment to the contractor for early completion of the contract. Incentive payments are included in contract revenue when: (a) the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded; and (b) the amount of the incentive payment can be measured reliably. Contract costs 16. Contract costs shall comprise: (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 (c) such other costs as are specifically chargeable to the customer under the terms of the contract. 17. Costs that relate directly to a specific contract include: (a) site labour costs, including site supervision; (b) c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded as part of the contract costs if they can be separately identified and measured reliably and it is probable that the contract will be obtained. When costs incurred in securing a contract are recognised as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period. Recognition of contract revenue and expenses 22. 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. An expected loss on the construction contract shall be recognised as an expense immediately in accordance with paragraph 36. 23. In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied: (a) total contract revenue can be measured reliably; (b) it is probable that the economic benefits associated with the contract will flow to the entity; (c) both the contract cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount in respect of which recovery has ceased to be probable is recognised as an expense rather than as an adjustment of the amount of contract revenue. 29. An entity is generally able to make reliable estimates after it has agreed to a contract which establishes: (a) each party s enforceable rights regarding the asset to be constructed; (b) the consideration to be exchanged; and (c) the manner and terms of settlement. It is also usually necessary for the entity to have an effective internal financial budgeting and reporting system. The entity reviews and, when necessary, revises the estimates of contract revenue and contract costs as the contract progresses. The need for such revisions does not necessarily indicate that the outcome of the contract cannot be estimated reliably. 30. The stage of completion of a contract may be determined in a variety of ways. The entity uses the method that measures reliably the work performed. Depending on the nature of the contract, the methods may include: (a) the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs; (b) surveys of work performed; or (c) completion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompletion of which is subject to the outcome of pending litigation or legislation; (c) relating to properties that are likely to be condemned or expropriated; (d) where the customer is unable to meet its obligations; or (e) where the contractor is unable to complete the contract or otherwise meet its obligations under the contract. 35. When the uncertainties that prevented the outcome of the contract being estimated reliably no longer exist, revenue and expenses associated with the construction contract shall be recognised in accordance with paragraph 22 rather than in accordance with paragraph 32. Recognition of expected losses 36. When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognised as an expense immediately. 37. The amount of such a loss is determined irrespective of: (a) whether work has commenced on the contract; (b) the stage of completion of contract activity; or (c) the amount of profits expected to arise on other contracts which are not treated as a single construction contract in accordance with paragraph 9. Changes in estimates 38. The percentage of completion m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs exceed costs incurred plus recognised profits (less recognised losses). 45. An entity discloses any contingent liabilities and contingent assets in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets. Contingent liabilities and contingent assets may arise from such items as warranty costs, claims, penalties or possible losses. Appendix A Service Concession Arrangements This Appendix is an integral part of Indian Accounting Standard (Ind AS) Background 1 Infrastructure for public services-such as roads, bridges, tunnels, prisons, hospitals, airports, water distribution facilities, energy supply and telecommunication networks-has traditionally been constructed, operated and maintained by the public sector and financed through public budget appropriation. 2 In recent times, governments have introduced contractual service arrangements to attract private sector participation in the development, financing, operation and maintenance of such infrastructure. The infrastructure may already exist, or may be constructed during the period of the service arrangement. An arrangement within the scope of this Appendix typically involves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the arrangement. 6. Infrastructure used in a public-to-private service concession arrangement for its entire useful life (whole of life assets) is within the scope of this Appendix if the conditions in paragraph 5(a) of this Appendix are met. Paragraphs AG1 AG8 of the Application Guidance of this Appendix provide guidance on determining whether, and to what extent, public-to-private service concession arrangements are within the scope of this Appendix. 7 This Appendix applies to both: (a) infrastructure that the operator constructs or acquires from a third party for the purpose of the service arrangement; and (b) existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement. 8 This Appendix does not specify the accounting for infrastructure that was held and recognised as property, plant and equipment by the operator before entering the service arrangement. The derecognition requirements of Indian Accounting Standards (as set out in Ind AS 16 ) apply to such infrastructure. 9 This Appendix does not specify the accounting by grantors. Issues 10 This Appendix sets out general principles on recognising and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consideration given by the grantor to the operator 15 If the operator provides construction or upgrade services the consideration received or receivable by the operator shall be recognized at its fair value. The consideration may be rights to: (a) a financial asset, or (b) an intangible asset. 16 The operator shall recognise a financial asset to the extent that it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services; the grantor has little, if any, discretion to avoid payment, usually because the agreement is enforceable by law. The operator has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator (a) specified or determinable amounts or (b) the shortfall, if any, between amounts received from users of the public service and specified or determinable amounts, even if payment is contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements. 17 The operator shall recognise an intangible asset to the extent that it receives a right (a licence) to charge users of the public servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through other comprehensive income; or (c) fair value through profit or loss. 25 If the amount due from the grantor is measured at amortised cost or fair value through other comprehensive income, Ind AS 109 requires interest calculated using the effective interest method to be recognised in profit or loss. Intangible asset 26 Ind AS 38 applies to the intangible asset recognised in accordance with paragraphs 17 and 18 of this Appendix. Paragraphs 45 47 of Ind AS 38 provide guidance on measuring intangible assets acquired in exchange for a non-monetary asset or assets or a combination of monetary and non-monetary assets. Items provided to the operator by the grantor 27 In accordance with paragraph 11, infrastructure items to which the operator is given access by the grantor for the purposes of the service arrangement are not recognised as property, plant and equipment of the operator. The grantor may also provide other items to the operator that the operator can keep or deal with as it wishes. If such assets form part of the consideration payable by the grantor for the services, they are not government grants as defined in Ind AS 20. They are recognised as asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as if it were already of the age and in the condition expected at the end of the period of the arrangement. AG5 Control should be distinguished from management. If the grantor retains both the degree of control described in paragraph 5(a) of Appendix A and any significant residual interest in the infrastructure, the operator is only managing the infrastructure on the grantor s behalf-even though, in many cases, it may have wide managerial discretion. AG6 Conditions (a) and (b) together identify when the infrastructure, including any replacements required (see paragraph 21 of Appendix A), is controlled by the grantor for the whole of its economic life. For example, if the operator has to replace part of an item of infrastructure during the period of the arrangement (eg the top layer of a road or the roof of a building), the item of infrastructure shall be considered as a whole. Thus condition (b) is met for the whole of the infrastructure, including the part that is replaced, if the grantor controls any significant residual interest in the final replacement of that part. AG7 Sometimes the use of infrastructure is partly regulated in the manner described in paragraph 5(a) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Build -operate -transfer Build own - operate 100% Divestment/ Privatisation/ Corporation Asset Ownership Grantor Operator Capital Investment Grantor Operator Demand risk Shared Grantor Operator and/or Grantor Operator Typical Duration 8 20 years 1 5 years 25 30 years Indefinite (or may be limited by licence) Residual Interest Grantor Operator Relevant Indian Accounting Standards Ind AS 17 Ind AS 18 This Appendix A Ind AS 16 Appendix B Service Concession Arrangements: Disclosures This Appendix is an integral part of Indian Accounting Standard (Ind AS) 11. Issues 1. An entity (the operator) may enter into an arrangement with another entity (the grantor) to provide services that give the public ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... significant terms of the arrangement that may affect the amount, timing and certainty of future cash flows (eg the period of the concession, re-pricing dates and the basis upon which re-pricing or re-negotiation is determined); (c) the nature and extent (eg quantity, time period or amount as appropriate) of: (i) rights to use specified assets; (ii) obligations to provide or rights to expect provision of services; (iii) obligations to acquire or build items of property, plant and equipment; (iv) obligations to deliver or rights to receive specified assets at the end of the concession period; (v) renewal and termination options; and (vi) other rights and obligations (eg major overhauls); (d) changes in the arrangement occurring during the period; and (d) how the service arrangement has been classified. 6A An operator shall disclose the amount of revenue and profits or losses recognized in the period on exchanging construction services for a financial asset or an intangible asset. 7 The disclosures required in accordance with paragraph 6 of this Appendix shall be provided individually for each service concession arrangement or in aggregate for each cl ..... 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