Question

Accounting for Construction Contracts IAS 11 has been subsumed under the standard IFRS   15, Revenues from Contract with customers. This has implications for the treatment of construction contracts including how they are accounted for, presented and disclosed.

Discuss making reference to the provisions of IFRS 15   Revenue from Contracts with Customers issued May 2014 and applicable for annual reporting beginning on or after January 1, 2018.

(Nb. The case information below is to be used to illustrate your understanding of the issues involved.)

Belvisja Limited has a fixed price contract for $9,000,000 to build a road, that is the initial amount agreed in the contract is $9 M. The contractor estimates that contract cost is $8,000,000. It will take three years to build the road.

By the end of year 1 the contractor’s estimate of contractors cost has increased to $8,050,000.

In year 2 the customer approves a variation resulting in an increase in contract revenue of $200,000 and estimated contract costs of $150,000.

At the end of year 2 costs incurred includes $100,000 for standard material storage on site to be used in year 3 to complete the project.

At the beginning of   year 3 the customer requested that the contract be adjusted by $500,000 for the cleaning of the drains.

The contractor determines the stage of completion of the contract by calculating the proportion that contract cost incurred for work performed to date bear to the latest estimated total contract costs.

Answer 1

As per IFRS 15 "Revenue from contract with customers", recognision of revenue shall be done in five step as discussed below :
(i) identify the contract(s) with a customer.
(ii) identify the performance obligations in the contract. Performance obligations are promises in a contract
to transfer to a customer goods or services that are distinct.
(iii) determine the transaction price. The transaction price is the amount of consideration to which an entity
expects to be entitled in exchange for transferring promised goods or services to a customer. If the
consideration promised in a contract includes a variable amount, an entity must estimate the amount of
consideration to which it expects to be entitled in exchange for transferring the promised goods or
services to a customer.
(iv) allocate the transaction price to each performance obligation on the basis of the relative stand-alone
selling prices of each distinct good or service promised in the contract.
(v) recognise revenue when a performance obligation is satisfied by transferring a promised good or service
to a customer (which is when the customer obtains control of that good or service). A performance obligation
may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time
(typically for promises to transfer services to a customer). For a performance obligation satisfied over time,
an entity would select an appropriate measure of progress to determine how much revenue should be
recognised as the performance obligation is satisfied.
Now compute revenue of Belvisja should be recognised with reference to IFRS 15:
(i) It is identified that there is a contract of $ 90,00,000 with customers.
(ii) There is performance obligations in the contract is construction of road as said three year will take
to complete the contract.
(iii) Determine the transaction price shall be based on obliogation performed as percentage of the cost
incurred to the estimated cost or revised cost estimated in year 1 and 2 even the same got approved by the
customers.
(iv) & (v) Allocation of transaction price to each performance obligation and recognise the revenue as following :
Year 1	(26,83,333 /80,50,000x90,00,000)   =		24,00,092
Year 2	(26,83,333x2-100000) /(81,50,000x92,00,000)- 24,00,092 =	22,65,487
Year 3	(92,00,000 - 24,00,092 - 22,65,487) =		45,34,421
Note: It is assumed that $ 26,83,333 has incurred in year one, two and three including $ 1,00,000 for standard
material storage.