Jun-11

(iv) (A) (B) (A) - (B)

($'000) Total Last year

Contract revenue 12,500 8,125 3,500 4,625 8,125 - Contract costs (9,500) (6,175) (2,660) (3,515) 7,300 1,125 Attibutable profit / (lo 3,000 1,950 840 1,110 1,125

(v) Amount due from contract customers Revenue recognised 8,125 Costs recognised (6,175) Billing issued (8,125) Cost incurred 7,300

1,125

Answer

Todate (65%)

Recognised in PL

Billing and

incurred

Amt due (to) / from

customers

Pilot Q5

a) A construction contract generally has the following characteristic :-

ii) Progressive billing to customers, and collection is based on such billing.

There are three possible way to recognise the revenue and profit for such contract :-

i) Recognised all revenue and profit upon signing the contract

ii) Recognised all revenue and profit upon completion

iii) Recognise revenue and profit based on progress of the contract

b)

Calculation of stage of completion

1 $3,300 $5,500 60%

2 $840 $1,200 70%

1 ($'000) Recognised in income statementContract revenue 5,500 3,300 Contract costs (4,000) (2,400)Attibutable profit / (lo 1,500 900

i) Contract sum (revenue) is pre-agreed, and total budgeted costs are known to the contractor before the work starts.

The argument for this is that revenue is known and contracted, plus the profit can be measured reliably at the start of the contract. However, adopting this kind of policy will lead to over aggressive revenue recognition and report huge volume of unrealised profit.

The argument for this is that prudence concept is exercised and the confirmed amount of revenue and profit give no room for error in estimation. However, adopting this kind of policy will violate the accrual concept, where a revenue must be reported when it is earned (in line with the progress of the contract).

This is known as percentage of completion method as per IAS 11, which is a fair method to report the revenue and profit based on level of completion of the construction.

The outcome of contract for 1 and 2 can be measured reliably. 1 is a profitable project and will be accounted for using stage of completion. 2's foreseeable losses will be recognised immediately in income statement.

2 ($'000) Recognised in income statementContract revenue 1,200 840 Contract costs (1,250) (890)Attibutable profit / (lo (50) (50)

Note : Full loss of $50,000 will be recognised immediately.

Income statement (extract) for the year ended 31st March 2006 ($'000)1 2 Total

Contract revenue 3,300 840 4,140 Contract costs (2,400) (890) (3,290)Attributable profit / (loss) 900 (50) 850

Statement of financial position (extract) as at 31st March 2006 ($'000)1 2 Total

Current AssetsAmount due from contract customers Revenue recognised 3,300 Costs recognised (2,400) Billing issued (3,000) Cost incurred 3,900

1,800 1,800

Current liabilitiesAmount due to contract customers Revenue recognised 840 Costs recognised (890) Allowance for loss (50) Reversal of allowance for loss 50 Billing issued (880) Cost incurred 720

(210) (210)