In: Accounting
Jordan is a construction contract company involved in building
commercial properties. Its current policy for determining the
percentage of completion of its contracts is based on the
proportion of cost incurred to date compared to the total expected
cost of the contract.
One of Jordan’s contracts has an agreed price of $250 million and
estimated total costs of $200 million.
The cumulative progress of this contract is:
Year ended: 30 September 2011 30 September 2012
$million $million
Costs incurred 80 145
Work certified and billed 75 160
Billings received 70 150
Based on the above, Jordan prepared and published its financial statements for the year ended 30 September 2011. Relevant extracts are:
Statement of Profit and Loss
$million
Revenue (balance) 100
Cost of sales (80)
––––
Profit (50 x 80/200) 20
––––
Statement of financial position
$million
Current assets
Amounts due from customers
Contract costs to date 80
Profit recognised 20
––––
100
Progress billings (75)
––––
25
––––
Contract receivables (75 – 70) 5
Jordan has received some adverse publicity in the financial
press for taking its profit too early in the contract process,
leading to disappointing profits in the later stages of contracts.
Most of Jordan’s competitors take profit based on the percentage of
completion as determined by the work certified compared to the
contract price.
Required:
(i) Assuming Jordan changes its method of determining
the percentage of completion of contracts to that used by its
competitors, and that this would represent a change in an
accounting estimate, calculate equivalent extracts to the above for
the year ended 30 September 2012 (5marks)
(ii) Explain the Criteria for Recognising Revenue from contract with customers. .
(iii) Explain the difference between Revenue Recognition from construction contracts when The contract is profit making and when losses are probable.
i)Estimation of % of achievement Program (Based on New Accounting Estimates):
I) Work Accredited: $160 million
Contract Value: $250 million
% of Achievement= (160/250*100)=64%
Accompanying is the Report of Profit including Loss for the year 2012
Particular | $ million |
Revenue (250*64%) | $160 |
Small: Previously identified in 2011 2011 | $100 |
Balance ( A) | $60 |
Value of Selling(200*64%) | $128 |
Small: Previously identified in 2011 2011 | $80 |
Balance ( B) | $48 |
Profit(A -B) | $12 |
Accompanying is the report of Financial Position for the year 2012:
Particular | $ million |
CURRENT LIABILITIES | |
cash due from clients(145-80) | $65 |
Contract Cost to date A | $12 |
Profit Realised | $77 |
Progressing Billing B | $(85) |
cash due from clients(A -B) | $8 |
Contract Received (85-80) | $5 |
Change in Accounting Estimates is the difference in Accounting in the present year as fine as in coming years. This should be regarded that Earlier years do not get exchanged due to Change in Accounting Estimates
ii)The guidelines for identifying revenue of a contract with clients are as below:
The presentation of IFRS 15 clarifies that an article identifies revenue by utilizing the accompanying 5 ways:
Task 1- Recognize the contract with clients
Task 2- Recognize the execution obligation with clients
Task 3- Prepare the purchase price
Task 4- Designate the purchase price to the performance responsibility in the contract
Task 5- Identify the Revenue when the Article provides the Execution obligation
iii)Differentiation within Revenue Recognition during from construction contract is profit-making also at losses are feasible:
Revenue Recognition when from construction contract is profit making | Revenue Recognition when losses are probable: |
Wherever result of the contract do can be calculated probably and the complete revenue exceeds the total value(this is profit) later it should be realized instantly in the Income Statement based on Conclusion of Contract which is also perceived as % of Completion Design | If a loss is required from a construction contract, this complete loss is identified quickly in the income record.This is an application of PRUDENCE CONCEPT while predicted losses are realized instantly. |