Long Term Construction Contracts

It 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.

• Consignment Contract

• Installment Contract

• Construction Contract

• Consignment Contract

It is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses.

• Fixed price contract

• Cost plus contract

• Variable contract

• Mixed contract

Aside from the initial amount of revenue agreed in the long-term construction contract, additional revenues may be recognized by the contractor (1) to the extent that it is probable that they will result in revenue and (2) they are capable of being reliably measured. Which of the following will not be considered as additional contract revenue by a contractor?

• Variation in contract work as instructed by the customer regarding the scope of work to be performed

• Claim that the contractor may seek to collect from the customer for customer caused delays or errors in specification or design

• Incentive payments to be paid to the contractor if specified performance standards are met or exceeded or for early completion of the contract

• Gain on sale of scrap materials from construction

Which of the following costs shall be excluded in the contract costs of construction contract?

• Costs that relate directly to the specific contract

• Costs that are directly attributable to contract activity in general and can be allocated to the contract

• Such other costs as are specifically chargeable to the customer under the terms of the contract

• Selling costs such as advertisement expense or commissions of real estate agents or brokers

The following costs shall be capitalized as part of construction in progress or contract costs, except

• Costs of hiring and moving of plant and equipment to and from the construction site

• Systematically, rationally and consistently allocated construction overheads and borrowing costs

• Costs that are specifically chargeable to the customer under the terms of the contract may include some general administration costs and development costs for which reimbursement is specified in the terms of the contract

• General research and development costs for which reimbursement is not specified in the contract.

When the outcome of a construction contract cannot be estimated reliably, how shall the contract revenue and contract costs associated with the construction contract be recognized?

• They shall be recognized as revenue and expenses respectively by reference to the state of completion of the contract activity at the end of the reporting period also known as by percentage of completion method.

• They shall be recognized as revenue and expenses respectively by reference to the percentage of collection of receivables from customers also known as by installment method

• They shall be recognized as revenue and expenses respectively by the date of earning of revenue or incurring of expenses also known as accrual method

• Revenue shall be recognized only to the extent of contract cost incurred that it is probable will be recoverable and the contract cost shall be recognized as an expense in the period in which there are incurred also known as cost recovery or zero-profit method

When it is probable that total contract costs will exceed total contract revenue, how shall it be accounted for?

• The unexpected loss shall be recognized as an expense immediately regardless of the certainty or uncertainty of the outcome of the construction contract.

• The expected loss shall be recognized as an expense immediately only when the outcome of a construction contract cannot be estimated reliably.

• The expected loss shall be recognized as an expense by reference to the state of completion of the contract activity at the end of the reporting period when the outcome of a construction contract cannot be estimated reliably.

• The expected loss shall be accounted for based on company's policy.

When the company decides to change its accounting for construction contract from percentage of completion to cost recovery method, how shall the accounting change be treated?

• It shall be accounted for as a change in accounting policy treated by retrospective application or with cumulative effect in the beginning retaining earnings at the date of change.

• It shall be accounted for as a change in account estimate treated by prospective application to the date of change and future date profit or loss.

• It shall be accounted for as a prior period error treated by retrospective restatement or with cumulative effect in the beginning retaining earnings at the date of discovery of error.

• It shall be accounted for as an equity transaction to be adjusted in the share premium or other comprehensive income as the case may be.

How shall the contractor present in its statement of financial the accounts related to construction contract?

• It is presented as an asset if Construction-in-Progress exceeds Progress Billings

• It is presented as a liability if Progress Billings exceeds Construction Progress

• Either A or B but the liabilities and assets resulting from the difference of Construction in Progress and Progress Billings shall not be netted or offsetted in the Statement of Financial Position

• Both A and B but the liabilities and assets resulting from the difference of Construction in Progress and Progress Billings shall be netted or offsetted in the Statement of Financial Position

Which of the following accounting changes shall be treated retrospectively instead prospectively by the long-term construction contractor?

• Change in the construction revenue

• Change in the estimated costs to complete the contract

• Change in the estimate of the outcome of the contract

• Change from percentage of completion to cost recovery method or vice versa