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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 ..... ch 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 fixed price contract is a construction contract in which the contractor agrees to a fixed contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 revenue 11. Contract revenue shall comprise: (a) the initial amount of revenue agreed in the contract; and (b) variations in contract work, claims and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) costs of materials used in construction; (c) depreciation of plant and equipment used on the contract; (d) costs of moving plant, equipment and materials to and from the contract site; (e) costs of hiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably; and (d) the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of a physical proportion of the contract work. Progress payments and advances received from customers often do not reflect the work performed. 31. When the stage of completion is determined by reference to the contract costs incurred to date, only those contract costs that reflect wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 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 method is applied on a cumulative basis in each accounting period to the current estimates of contract revenue and contract costs. Therefore, the effect of a change in the estimate of contract revenue or contract costs, or the effect of a change in the estimate of the outcome of a contract, is accounted for as a change in accounting estima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 a private sector entity (an operator) constructing the infrastructure used to provide the public service or upgrading it (for example, by increasing its capacity) and operating and maintaining that infrastructure for a specified period of time. The operator is paid for its services over the period of the arrangement. The arrangement is governed by a contract that sets out performance standards, mechanisms for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 measuring the obligations and related rights in service concession arrangements. Requirements for disclosing information about service concession arrangements are in Appendix B to this Indian Accounting Standard. The issues addressed in this Appendix are: (a) treatment of the operator's rights over the infrastructure; (b) recognition and measurement of arrangement consideration; (c) construction or upgrade services; (d) operation serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 service. A right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service. 18 If the operator is paid for the construction services partly by a financial asset and partly by an intangible asset it is necessary to account separately for each component of the operator's consideration. The consideration received or receivable for both components shall be recognised initially at the fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assets of the operator, measured at fair value on initial recognition. The operator shall recognise a liability in respect of unfulfilled obligations it has assumed in exchange for the assets. Application Guidance on Appendix A This Application Guidance is an integral part of Appendix A Scope (paragraph 5 of Appendix A) AG1 Paragraph 5 of Appendix A specifies that infrastructure is within the scope of the Appendix when the following conditions apply: (a) the grantor controls or regulates what services the operator must provide wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired (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 Appendix A and partly unregulated. However, these arrangements take a variety of forms: (a) any infrastructure that is physically separable and capable of being operated independently and meets the definition of a cash-generating unit as defined in Ind AS 36 shall be analysed separately if it is used wholly for unregulated purposes. For example, this might apply to a private wing of a hospital, where the remainder of the hospital is used by the grantor to treat public patients. (b) when purely ancillary activities (such as a hospital shop) are unregula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... give the public access to major economic and social facilities. The grantor may be a public or private sector entity, including a governmental body. Examples of service concession arrangements involve water treatment and supply facilities, motorways, car parks, tunnels, bridges, airports and telecommunication networks. Examples of arrangements that are not service concession arrangements include an entity outsourcing the operation of its internal services (eg employee cafeteria, building maintenance, and accounting or information technology functions). 2. A service concession arrangement generally involves the grantor conveying for the period of the concession to the operator: (a) the right to provide services that give the public access to major economic and social facilities, and (b) in some cases, the right to use specified tangible assets, intangible assets, or financial assets, in exchange for the operator: (c) committing to provide the services according to certain terms and conditions during the concession period, and (d) when applicable, committing to return at the end of the concession period the rights received at the beginning of the concession period and/or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncession arrangements. A class is a grouping of service concession arrangements involving services of a similar nature (eg toll collections, telecommunications and water treatment services). Appendix C References to matters contained in other Indian Accounting Standards This Appendix is an integral part of Indian Accounting Standard (Ind AS) 11. This appendix lists the appendices which are part of other Indian Accounting Standards and makes reference to Ind AS 11, Construction Contracts. 1. Appendix A Intangible Assets-Web Site Costs contained in Ind AS 38, Intangible Assets. Appendix 1 Note: This Appendix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the differences, if any, between Indian Accounting Standard (Ind AS) 11 and the corresponding International Accounting Standard (IAS) 11, Construction Contracts, IFRIC 12, Service Concession Arrangements and SIC 29, Service Concession Arrangements: Disclosures Comparison with IAS 11, Construction Contracts, IFRIC 12, Service Concession Arrangements and SIC 29, Service Concession Arrangements: Disclosures 1. The transitional provisions given in IFRIC 12 have not been given ..... X X X X Extracts X X X X X X X X Extracts X X X X
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