## Combining and Segmenting Construction Contracts

A single contract document does not automatically mean one accounting contract. AS 7 requires you to look at economic substance over legal form.

### When to Treat as SEPARATE Contracts

Even if bundled in one document, treat each asset as a separate contract when all three conditions are met:

1. Separate proposals have been submitted for each asset

2. Each asset was subject to separate negotiation — the contractor or customer can accept or reject any part independently

3. Cost and revenue of each asset can be identified separately

### When to COMBINE Contracts (Treat as One)

A group of contracts should be treated as a single contract when:

Negotiated as a single package
Contracts are closely interrelated (one affects the other)
Performed concurrently or in continuous sequence

### Decision Summary

Scenario	Treatment
Separate proposals, separate negotiation, costs/revenue identifiable per asset	Separate Contracts
Negotiated as one package, costs/revenue not separately identifiable	Combined Contract

### Practical Impact

Treatment affects % completion calculation — a loss on one combined contract cannot be offset by a profit on another separate contract.

Worked example

### Example 1

Example: Separate or Combined?

A contractor wins a ₹230 lakh project covering four assets:

Building: ₹100 lakhs (separate proposal, separate negotiation, costs identifiable)
Swimming Pool: ₹20 lakhs (separate proposal, separate negotiation, costs identifiable)
Mini-theatre: ₹60 lakhs (separate proposal, separate negotiation, costs identifiable)
OYO Hotel + Golf Course: ₹75 + ₹25 = ₹100 lakhs (negotiated as one package, no separate negotiation, costs not identifiable per asset)

Analysis:

Building, Pool, Mini-theatre → All three conditions met → 3 Separate Contracts
OYO Hotel + Golf Course → Negotiated as one package → 1 Combined Contract

Result: 4 contracts are treated as 4 accounting units (3 separate + 1 combined).

⚠️ Common exam mistakes

Assuming one contract document = one accounting contract — look through to economic substance.
Missing that ALL THREE conditions must be satisfied simultaneously to split into separate contracts.
Forgetting the third condition — costs and revenue of each asset must be identifiable separately (this is the most commonly failed condition in practice).
Applying the combining rules only when assets are physically connected — legal/commercial bundling is what triggers the test.

Bare-Act text Paras 8–9 (Combining and Segmenting Contracts) · AS 7 – Construction Contracts · click to expand

A group of contracts, whether with a single customer or with several customers, should 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.

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