Standard · ASLB

ASLB 11 Construction Contracts

316

Paragraphs

7,979

Words

—

Past Q citations

Practice on this → Open ICAI PDF

Accounting Standard for Local Bodies (ASLB) 11

Construction Contracts

Contents

Paragraphs
OBJECTIVE

SCOPE 1-3

DEFINITIONS 4-11

Construction Contracts 5-10

Contractor 11

COMBINING AND SEGMENTING CONSTRUCTION CONTRACTS 12-15

CONTRACT REVENUE 16-22

CONTRACT COSTS 23-29

RECOGNITION OF CONTRACT REVENUE AND EXPENSES 30-43

RECOGNITION OF EXPECTED DEFICITS 44-48

CHANGES IN ESTIMATES 49

DISCLOSURE 50-56
APPENDICES :

Appendix A : Implementation Guidance

Appendix 1 : Comparison with IPSAS 11

Appendix 2 : Comparison with existing AS 7
Accounting Standard for Local Bodies (ASLB) 11

Construction Contracts

(This Accounting Standard includes paragraphs set in bold italic type and plain
type, which have equal authority. Paragraphs in bold italic type indicate the
main principles. This Accounting Standard should be read in the context of its
objectives and the Preface to the Accounting Standards for Local Bodies1).

The Accounting Standard for Local Bodies (ASLB) 11, ‘Construction Contracts’,
issued by the Council of the Institute of Chartered Accountants of India, will be
recommendatory in nature in the initial years for use by the local bodies. This
Standard will be mandatory for Local Bodies in a State from the date specified
in this regard by the State Government concerned2.

The following is the text of the Accounting Standard for Local Bodies.

Objective
The objective of this Standard is to prescribe the accounting treatment of costs
and revenue associated with construction contracts. The Standard:

● Identifies the arrangements that are to be classified as construction
contracts;

● Provides guidance on the types of construction contracts that can arise in
the local bodies; and

● Specifies the basis for recognition and disclosure of contract expenses
and, if relevant, contract revenues.

1
Attention is specifically drawn to paragraph 4.2 of the ‘Preface to the Accounting
Standards for Local Bodies’, according to which Accounting Standards are intended to
apply only to items which are material.
2
Reference may be made to the paragraph 7.1 of the ‘Preface to the Accounting
Standards for Local Bodies’ providing the discussion on the compliance with the
Accounting Standards for Local Bodies.
Compendium of ASLBs

Because of the nature of the activity undertaken in construction contracts, the
date at which the contract activity is entered into and the date when the activity
is completed usually fall into different reporting periods.

In many cases, construction contracts entered into by local bodies may or may
not specify an amount of contract revenue. Rather, funding to support the
construction activity will be provided by an appropriation or similar allocation of
government revenue, or by aid or grant funds. In these cases, the primary issue
in accounting for construction contracts is (a) the allocation of construction costs
to the reporting period in which the construction work is performed, and (b) the
recognition of related expenses.

In some other cases, construction contracts entered into by local bodies may be
established on a commercial basis or a non-commercial full or partial cost
recovery basis. In these cases, the primary issue in accounting for construction
contracts is the allocation of both contract revenue and contract costs to the
reporting periods in which construction work is performed.

Scope
1. An entity that prepares and presents financial statements under the
accrual basis of accounting, should apply this Standard in accounting for
construction contracts.

2. This Standard applies to all entities described as Local Bodies in the
Preface to the Accounting Standards for Local Bodies3.

3. [Refer to Appendix 1]

Definitions
4. The following terms are used in this Standard with the meanings
specified:

Construction contract is a contract, or a similar binding arrangement,
specifically negotiated for the construction of an asset or a

3
Refer to paragraph 1.3 of the ‘Preface to the Accounting Standards for Local Bodies’.
118
Construction Contracts

combination of assets that are closely interrelated or interdependent
in terms of their design, technology and function or their ultimate
purpose or use.

Contractor is an entity that performs construction work pursuant to
a construction contract.

Cost plus or cost based contract is a construction contract in which
the contractor is reimbursed for allowable or otherwise defined costs
and, in the case of a commercially-based contract, an additional
percentage of these costs or a fixed fee, if any.

Fixed price contract 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.

Terms defined in other Accounting Standards for Local Bodies are
used in this Standard with the same meaning as in those other
Standards.

Construction Contracts

5. A construction contract (the terms “construction contract” and “contract”
are used interchangeably in the remainder of this Standard) may be negotiated
for the construction of a single asset such as a bridge, building, dam, pipeline,
road, ship or tunnel. A construction contract may also deal with the construction
of a number of assets that are closely interrelated or interdependent in terms of
their design, technology and function or their ultimate purpose or use - examples
of such contracts include those for the construction of reticulated water supply
systems, roads, bridges, flyovers and other complex infrastructure assets.

6. For the purposes of this Standard, construction contracts include:

(a) Contracts for the rendering of services that are directly related to the
construction of the asset, for example, those for the services of project
managers and architects; and

(b) Contracts for the destruction or restoration of assets, and the restoration
of the environment following the demolition of assets.
119
Compendium of ASLBs

7. For the purposes of this Standard, construction contracts also include all
arrangements that are binding the parties to the arrangement, but which may
not take the form of a documented contract. For example, components of local
body may enter into a formal arrangement for the construction of an asset but
the arrangement may not constitute a legal contract because the individual
departments of the local body may not be separate legal entities with the power
to contract. However, provided that the arrangement confers similar rights and
obligations on the parties to it as if it were in the form of a contract, it is a
construction contract for the purposes of this Standard. Such binding
arrangements could include (but are not limited to) a decision of the body
governing the local body, or a memorandum of understanding.

8. Construction contracts are formulated in a number of ways, which, for the
purposes of this Standard, are classified as fixed price contracts (lump sum
contract), and cost plus or cost based contracts. Some commercial construction
contracts may contain characteristics of both a fixed price contract and a cost
plus or cost based contract, for example, in the case of a cost plus or cost
based contract with an agreed maximum price. In such circumstances, a
contractor needs to consider all the conditions in paragraphs 31 and 32 in order
to determine when to recognise contract revenue and expenses.

9. Cost plus and cost based contracts encompass both commercial and
non-commercial contracts. A commercial contract will specify that revenue to
cover the contractor’s construction costs as agreed and generate a profit margin
will be provided by the other parties to the contract. However, an entity may
also enter into a non-commercial contract to construct an asset for another
entity in return for full or partial reimbursement of costs from that entity or other
parties. In some cases, the cost recovery may encompass payments by the
recipient entity and specific purpose construction grants or funding from other
parties.

10. In certain cases, where one local body constructs assets for another
governmental body, the cost of construction activity is not recovered directly
from the recipient. Rather, the construction activity is funded indirectly (a) by
way of a general appropriation or other allocation of general government funds
to the contractor, or (b) from general purpose grants from third party funding
agencies or other governments. These are classified as fixed price contracts for
the purpose of this Standard.

120
Construction Contracts

10A. It is possible that a local body performs a construction activity for another
entity under the arrangement termed as ‘Deposit Works’. This Standard will be
applicable to arrangements, if the local body acts as a contractor as defined in
this Standard.

Contractor

11. A contractor is an entity that enters into a contract to build structures,
construct facilities, produce goods, or render services to the specifications of
another entity. The term “contractor” includes a general or prime contractor, a
subcontractor to a general contractor, or a construction manager.

Combining and Segmenting Construction Contracts
12. The requirements of this Standard are usually applied separately to each
construction contract. However, in certain circumstances, it is necessary to
apply the Standard to the separately identifiable components of a single contract
or to a group of contracts together in order to reflect the substance of a contract
or a group of contracts.

13. When a contract covers a number of assets, the construction of
each asset should be treated as a separate construction contract when:

(a) Separate proposals have been submitted for each asset;

(b) Each asset has been subject to separate negotiation and the
contractor and customer have been able to accept or reject that part
of the contract relating to each asset; and

14. 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 margin, if any; and
121
Compendium of ASLBs

15. A contract may provide for the construction of an additional asset at
the option of the customer, or may be amended to include the construction
of an additional asset. The construction of the additional asset should be
treated as a separate construction contract when:

(a) The asset differs significantly in design, technology or function from
the asset or assets covered by the original contract; or

(b) The price of the asset is negotiated without regard to the original
contract price.

Contract Revenue
16. Contract revenue should comprise:

(a) The initial amount of revenue agreed in the contract; and

(b) Variations in contract work, claims and incentive payments to the
extent that:

(i) It is probable that they will result in revenue; and

(ii) They are capable of being reliably measured.

17. Contract revenue is measured at the consideration received or receivable.
Both the initial and ongoing measurement of contract revenue are affected by a
variety of uncertainties that depend on the outcome of future events. The
estimates often need to be revised as events occur and uncertainties are resolved.
Where a contract is a cost plus or cost based contract, the initial amount of
revenue may not be stated in the contract. Instead, it may need to be estimated
on a basis consistent with the terms and provisions of the contract, such as by
reference to expected costs over the life of the contract.

18. In addition, the amount of contract revenue may increase or decrease
from one period to the next. For example:

122
Construction Contracts

(a) A contractor and a customer may agree to variations or claims that increase
or decrease contract revenue in a period subsequent to that in which the
contract was initially agreed;

(b) The amount of revenue agreed in a fixed price, cost plus or cost based
contract may increase as a result of cost escalation or other clauses;

(c) The amount of contract revenue may decrease as a result of penalties
arising from delays caused by the contractor in the completion of the
contract; or

(d) When a fixed price contract involves a fixed price per unit of output,
contract revenue increases or decreases as the number of units is
increased or decreased.

19. A variation is an instruction by the customer for a change in the scope of
the work to be performed under the contract. A variation may lead to an increase
or a decrease in contract revenue. Examples of variations are changes in the
specifications or design of the asset and changes in the duration of the contract.
A variation is included in contract revenue when:

(a) It is probable that the customer will approve the variation and the amount
of revenue arising from the variation; and

(b) The amount of revenue can be measured reliably.

20. A claim is an amount that the contractor seeks to collect from the customer
or another party as reimbursement for costs not included in the contract price. A
claim may arise from, for example, customer caused delays, errors in
specifications or design, and disputed variations in contract work. The
measurement of the amounts of revenue arising from claims is subject to a high
level of uncertainty and often depends on the outcome of negotiations. Therefore,
claims are only included in contract revenue when:

(a) Negotiations including dispute resolution mechanism such as arbitration/
adjudication by third party acceptable to both the parties to the contract,
have reached an advanced stage such that it is probable that the customer
will accept the claim; and

123
Compendium of ASLBs

(b) The amount that it is probable will be accepted by the customer can be
measured reliably.

21. Incentive payments are additional amounts paid to the contractor if
specified performance standards are met or exceeded. For example, a contract
may allow for an incentive payment to the contractor for early completion of the
contract. Incentive payments are included in contract revenue when:

(a) The contract is sufficiently advanced that it is probable that the specified
performance standards will be met or exceeded; and

(b) The amount of the incentive payment can be measured reliably.

22. Contractors should review all amounts relating to the construction contract
that are paid directly to subcontractors by third party funding agencies, to
determine whether they meet the definition of, and recognition criteria for, revenue
of the contractor under the terms of the contract. Amounts meeting the definition
and recognition criteria for revenue should be accounted for by the contractor in
the same way as other contract revenue. Such amounts should also be
recognised as contract costs (refer to paragraph 25). Funding agencies may
include provincial, national and international aid agencies and multilateral and
bilateral development banks.

Contract Costs
23. Contract costs should comprise:

(a) Costs that relate directly to the specific contract;

(b) Costs that are attributable to contract activity in general and can be
allocated to the contract on a systematic and rational basis; and

24. Costs that relate directly to a specific contract include:

(a) Site labour costs, including site supervision;

124
Construction Contracts

(b) Costs of materials used in construction;

(d) Costs of moving plant, equipment and materials to and from the contract
site;

(e) Costs of hiring plant and equipment;

(f) Costs of design and technical assistance that are directly related to the
contract;

(g) The estimated costs of rectification and guarantee work, including expected
warranty costs; and

(h) Claims from third parties.

These costs may be reduced by any incidental revenue that is not included in
contract revenue, for example, revenue from the sale of surplus materials at the
end of the contract.

25. Contractors should review all amounts relating to the construction contract
paid directly by subcontractors and which are reimbursed by third party funding
agencies, to determine whether they qualify as contract costs. Amounts meeting
the definition of, and recognition criteria for, contract expenses should be
accounted for by the contractor in the same way as other contract expenses.
Amounts reimbursed by third party funding agencies which meet the definition
of, and recognition criteria for, revenue should be accounted for by the contractor
in the same way as other contract revenue (refer to paragraph 22).

26. Costs that may be attributable to contract activity in general and can be
allocated to specific contracts include:

(a) Insurance;

(b) Costs of design that are not directly related to a specific contract; and

125
Compendium of ASLBs

Such costs are allocated using methods that (a) are systematic and rational,
and (b) are applied consistently to all costs having similar characteristics. The
allocation is based on the normal level of construction activity. Construction
overheads include costs such as the preparation and processing of construction
personnel payroll. Costs that may be attributable to contract activity in general
and can be allocated to specific contracts also include borrowing costs. The
capitalisation of the borrowing costs should be done in accordance with ASLB
5, ‘Borrowing Costs’.

27. 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.

28. Costs that cannot be attributed to contract activity or cannot be allocated
to a contract are excluded from the costs of a construction contract. Such costs
include:

(a) General administration costs for which reimbursement is not specified in
the contract;

(b) Selling costs;

(d) Depreciation of idle plant and equipment that is not used on a particular
contract.

29. Contract costs include the costs attributable to a contract for the period
from the date of securing the contract to the formal completion of the contract.
However, costs that relate directly to a contract and which are incurred in
securing the contract are also included as part of the contract costs, if they can
be separately identified and measured reliably and it is probable that the contract
will be obtained. When costs incurred in securing a contract are recognised as
an expense in the period in which they are incurred, they are not included in
contract costs when the contract is obtained in a subsequent period.

126
Construction Contracts

Recognition of Contract Revenue and Expenses
30. When the outcome of a construction contract can be estimated
reliably, contract revenue and contract costs associated with the
construction contract should be recognised as revenue and expenses
respectively by reference to the stage of completion of the contract activity
at the reporting date. An expected deficit on a construction contract to
which paragraph 44 applies should be recognised as an expense
immediately in accordance with paragraph 44.

31. In the case of a fixed price contract, the outcome of a construction
contract can be estimated reliably when all the following conditions are
satisfied:

(a) Total contract revenue, if any, can be measured reliably;

(b) It is probable that the economic benefits or service potential
associated with the contract will flow to the entity;

(c) Both the contract costs to complete the contract and the stage of
contract completion at the reporting date can be measured reliably;
and

(d) The contract costs attributable to the contract can be clearly identified
and measured reliably so that actual contract costs incurred can be
compared with prior estimates.

32. In the case of a cost plus or cost based contract, the outcome of a
construction contract can be estimated reliably when all the following
conditions are satisfied:

(a) It is probable that the economic benefits or service potential
associated with the contract will flow to the entity; and

(b) The contract costs attributable to the contract, whether or not
specifically reimbursable, can be clearly identified and measured
reliably.

127
Compendium of ASLBs

33. The recognition of revenue and expenses by reference to the stage of
completion of a contract is often referred to as the percentage of completion
method. Under this method, contract revenue is matched with the contract costs
incurred in reaching the stage of completion, resulting in the reporting of revenue,
expenses and surplus/deficit, which can be attributed to the proportion of work
completed. This method provides useful information on the extent of contract
activity and performance during a period.

34. Under the percentage of completion method, contract revenue is
recognised as revenue in the income and expenditure account in the reporting
periods in which the work is performed. Contract costs are usually recognised
as an expense in the income and expenditure account in the reporting periods
in which the work to which they relate is performed. However, where it is
intended at inception of the contract that contract costs are to be fully recovered
from the parties to the construction contract, any expected excess of total contract
costs over total contract revenue for the contract is recognised as an expense
immediately in accordance with paragraph 44.

35. A contractor may have incurred contract costs that relate to future activity
on the contract. Such contract costs are recognised as an asset, provided it is
probable that they will be recovered. Such costs represent an amount due from
the customer and are often classified as contract work in progress.

36. The outcome of a construction contract can only be estimated reliably
when it is probable that the economic benefits or service potential associated
with the contract will flow to the entity. However, when an uncertainty arises
about the collectability of an amount already included in contract revenue, and
already recognised in the income and expenditure account, the uncollectable
amount or the amount in respect of which recovery has ceased to be probable
is recognised as an expense rather than as an adjustment of the amount of
contract revenue.

37. An entity is generally able to make reliable estimates after it has agreed
to a contract, which establishes:

(a) Each party’s enforceable rights regarding the asset to be constructed;

(b) The consideration, if any, to be exchanged; and

128
Construction Contracts

It is also usually necessary for the entity to have an effective internal financial
budgeting and reporting system. The entity reviews and, when necessary, revises
the estimates of contract revenue and contract costs as the contract progresses.
The need for such revisions does not necessarily indicate that the outcome of
the contract cannot be estimated reliably.

38. The stage of completion of a contract may be determined in a variety of
ways. The entity uses the method that measures reliably the work performed.
Depending on the nature of the contract, the methods may include:

(a) The proportion that contract costs incurred for work performed to date
bear to the estimated total contract costs;

(b) Surveys of work performed; or

Progress payments and advances received from customers often do not reflect
the work performed.

39. When the stage of completion is determined by reference to the contract
costs incurred to date, only those contract costs that reflect work performed are
included in costs incurred to date. Examples of contract costs, which are excluded,
are:

(a) Contract costs that relate to future activity on the contract, such as costs
of materials that have been delivered to a contract site or set aside for
use in a contract, but not yet installed, used or applied during contract
performance, unless the materials have been made specially for the
contract; and

(b) Payments made to subcontractors in advance of work to be performed
under the subcontract.

129
Compendium of ASLBs

40. When the outcome of a construction contract cannot be estimated
reliably:

(a) Revenue should be recognised only to the extent of contract costs
incurred that it is probable will be recoverable; and

(b) Contract costs should be recognised as an expense in the period in
which they are incurred.

An expected deficit on a construction contract to which paragraph 44
applies should be recognised as an expense immediately in accordance
with paragraph 44.

41. During the early stages of a contract it is often the case that the outcome
of the contract cannot be estimated reliably. Nevertheless, it may be probable
that the entity will recover the contract costs incurred. Therefore, contract revenue
is recognised only to the extent of costs incurred that are expected to be
recoverable. As the outcome of the contract cannot be estimated reliably, no
surplus or deficit is recognised. However, even though the outcome of the
contract cannot be estimated reliably, it may be probable that total contract
costs will exceed total contract revenues. In such cases, any expected excess
of total contract costs over total contract revenues for the contract is recognised
as an expense immediately in accordance with paragraph 44.

42. Where contract costs that are to be reimbursed by parties to the contract,
are not probable of being recovered, they are recognised as an expense
immediately. Examples of circumstances in which the recoverability of contract
costs incurred may not be probable and in which contract costs may need to be
recognised as an expense immediately include contracts:

a) Which are not fully enforceable, that is, their validity is seriously in question;

b) The completion of which is subject to the outcome of pending litigation or
legislation;

c) Relating to properties that are likely to be condemned or expropriated;

d) Where the customer is unable to meet its obligations; or

130
Construction Contracts

e) Where the contractor is unable to complete the contract or otherwise
meet its obligations under the contract.

43. When the uncertainties that prevented the outcome of the contract
being estimated reliably no longer exist, revenue and expenses associated
with the construction contract should be recognised in accordance with
paragraph 30 rather than in accordance with paragraph 40.

Recognition of Expected Deficits
44. In respect of construction contracts in which it is intended at
inception of the contract that contract costs are to be fully recovered from
the parties to the construction contract, when it is probable that total
contract costs will exceed total contract revenue, the expected deficit should
be recognised as an expense immediately.

45. Local Bodies may enter into construction contracts which specify that the
revenue intended to cover the construction costs will be provided by the other
parties to the contract. This may occur where, for example:

(a) Local Bodies that are largely dependant on appropriations or similar
allocations of government revenue to fund their operations are also
empowered to contract with any public sector undertaking or private sector
entities for the construction of assets on a commercial or full cost recovery
basis; or

(b) Components of Local Bodies transact with each other on an arm’s length
or commercial basis as may occur under a “purchaser-provider” or similar
other arrangements.

In these cases, an expected deficit on a construction contract is recognised
immediately in accordance with paragraph 44.

46. As noted in paragraph 9, in some cases an entity may enter into a
construction contract for less than full cost recovery from the other parties to the
contract. In these cases, funding in excess of that specified in the construction
contract will be provided from an appropriation or other allocation of government
funds to the contractor, or from general purpose grants from third party funding
agencies or other governments. The requirements of paragraph 44 do not apply
to these construction contracts.
131
Compendium of ASLBs

47. In determining the amount of any deficit under paragraph 44, total contract
revenue and total contract costs may include payments made directly to
subcontractors by third party funding agencies in accordance with paragraphs
22 and 25.

48. The amount of such a deficit is determined irrespective of:

(a) Whether or not work has commenced on the contract;

(b) The stage of completion of contract activity; or

(c) The amount of surpluses expected to arise on other commercial
construction contracts that are not treated as a single construction contract
in accordance with paragraph 14.

Changes in Estimates
49. The percentage of completion method is applied on a cumulative basis in
each reporting period to the current estimates of contract revenue and contract
costs. Therefore, the effect of a change in the estimate of contract revenue or
contract costs, or the effect of a change in the estimate of the outcome of a
contract, is accounted for as a change in accounting estimate (see ASLB 3,
‘Accounting Policies, Changes in Accounting Estimates and Errors’). The changed
estimates are used in the determination of the amount of revenue and expenses
recognised in the income and expenditure account in the period in which the
change is made and in subsequent periods.

Disclosure
50. An entity should disclose:

(a) The amount of contract revenue recognised as revenue in the period;

(b) The methods used to determine the contract revenue recognised in
the period; and

132
Construction Contracts

51. An entity should disclose each of the following for contracts in
progress at the reporting date:

(a) The aggregate amount of costs incurred and recognised surpluses
(less recognised deficits) to date;

(b) The amount of advances received; and

52. Retentions are amounts of progress billings that are not paid until the
satisfaction of conditions specified in the contract for the payment of such
amounts or until defects have been rectified. Progress billings are amounts of
contract revenue billed for work performed on a contract, whether or not they
have been paid by the customer. Advances are amounts of contract revenue
received by the contractor before the related work is performed.

53. An entity should present:

(a) The gross amount due from customers for contract work as an asset;
and

(b) The gross amount due to customers for contract work as a liability.

54. The gross amount due from customers for contract work is the net amount
of:

(a) Costs incurred plus recognised surpluses; less

(b) The sum of recognised deficits and progress billings for all contracts in
progress for which costs incurred plus recognised surpluses to be
recovered by way of contract revenue (less recognised deficits) exceeds
progress billings.

55. The gross amount due to customers for contract work is the net amount of:

(a) Costs incurred plus recognised surpluses; less

(b) The sum of recognised deficits and progress billings for all contracts in
progress for which progress billings exceed costs incurred plus recognised
133
Compendium of ASLBs

surpluses to be recovered by way of contract revenue (less recognised
deficits).

56. Guidance on the disclosure of contingent liabilities and contingent assets
can be found in ASLB 19, ‘Provisions, Contingent Liabilities and Contingent
Assets’. Contingent liabilities and contingent assets may arise from such items
as warranty costs, claims, penalties or possible losses.

57. [Refer to Appendix 1]

58. [Refer to Appendix 1]

134
Construction Contracts

Appendix A

Implementation Guidance
The appendix is illustrative only and does not form part of the ASLB 11.

Disclosure of Accounting Policies

IG1. The following are the examples of accounting policy disclosures for a
local body which enters non-commercial construction contracts with other
government agencies for full, partial or no cost recovery from the other parties
to the contract. The local body is also empowered to enter into commercial
construction contracts with private sector entities and Public Sector Undertakings
(PSUs) and to enter full cost recovery construction contracts as may be specified
by appropriate agencies with certain state hospitals and state universities.

Non-Commercial Contracts

IG2. Contract costs are recognised as an expense on the percentage of
completion method, measured by reference to the percentage of labour hours
incurred to date to estimated total labour hours for each contract. In some
cases, certain construction activity and technical supervision have been
subcontracted to private sector contractors for a fixed “completion of contract”
fee. Where this has occurred, the subcontracted costs are recognised as an
expense on the percentage of completion method for each subcontract.

IG3. Contract revenue from full cost recovery contracts and partial cost recovery
contracts entered into by the local body is recognised by reference to the
recoverable costs incurred during the period, measured by the proportion that
recoverable costs incurred to date bear to the estimated total recoverable costs
of the contract.

Commercial Contracts
IG4. Revenue from fixed price construction contracts is recognised on the
percentage of completion method, measured by reference to the percentage of
labour hours incurred to date to estimated total labour hours for each contract.

135
Compendium of ASLBs

IG5. Revenue from cost plus or cost-based contracts is recognised by reference
to the recoverable costs incurred during the period plus the fee earned, measured
by the proportion that costs incurred to date bear to the estimated total costs of
the contract.

The Determination of Contract Revenue and Expenses
IG6. The following examples deal with a non-commercial and a commercial
construction contract. The examples illustrate one method of determining the
stage of completion of a contract and the timing of the recognition of contract
revenue and expenses (see paragraphs 30 to 43 of this Standard).

Non-Commercial Contracts
IG7. The Engineering and Public Works Department of a local body (the
construction contractor) has a contract to build a bridge for the Department of
Roads and Highways. The local body is funded by appropriation. The construction
contract identifies construction requirements, including anticipated costs, technical
specifications and timing of completion, but does not provide for any recovery of
construction costs directly from the Department of Roads and Highways. The
construction contract is a key management planning and accountability document
attesting to the design and construction qualities of the bridge. It is used as
input in assessing the performance of the contracting parties in delivering services
of agreed technical specification within projected cost parameters. It is also
used as input to future cost projections.

IG8. The initial estimate of contract costs is 8,000. It will take three years to
build the bridge. An aid agency has agreed to provide funding of 4,000, being
half of the construction costs - this is specified in the construction contract.

IG9. By the end of Year 1, the estimate of contract costs has increased to
8,050.

IG10. In Year 2, the Department of Roads and Highways approves a variation
resulting in estimated additional contract costs of 150. The aid agency agrees to
fund 50% of the variation including the variation of year 1. At the end of Year 2,
costs incurred include 100 for standard materials stored at the site to be used in
Year 3 to complete the project.

136
Construction Contracts

IG11. The local body determines the stage of completion of the contract by
calculating the proportion that contract costs incurred for work performed to
date bear to the latest estimated total contract costs.

IG12. A summary of the financial data during the construction period is as
follows:

Year 1 Year 2 Year 3
Initial amount of revenue agreed in contract 4,000 4,000 4,000
Variation in contract revenue _ 100 100
Total Contract Revenue 4,000 4,100 4,100
Contract costs incurred to date 2,093 6,168 8,200
Contract costs to complete 5,957 2,032 _
Total estimated contract costs 8,050 8,200 8,200
Stage of completion 26% 74% 100%

IG13. The stage of completion for Year 2 (74%) is determined by excluding
from contract costs incurred for work performed to date the 100 for standard
materials stored at the site for use in year 3.

IG14. The amounts of contract revenue and expenses recognised in the income
and expenditure account in the three years are as follows:

To Date Recognised Recognised
in prior years in current year
Year 1
Revenue (4,000 x .26) 1,040 1,040
Expenses (8,050 x .26) 2,093 2,093
Year 2
Revenue (4,100 x .74) 3,034 1,040 1,994
Expenses (8,200 x .74) 6,068 2,093 3,975
Year 3
Revenue (4,100 x 1.00) 4,100 3,034 1,066
Expenses (8,200 x 1.00) 8,200 6,068 2,132

137
Compendium of ASLBs

Commercial Contracts

IG15. The local body’s Engineering and Public Works Department (the
contractor), while predominantly funded by appropriation is empowered to
undertake limited construction work on a commercial basis for private sector
entities. With the authority of the governing board of the local body, the local
body has entered a fixed price commercial contract for 9,000 to build a bridge.

IG16. The initial amount of revenue agreed in the contract is 9,000. The
contractor’s initial estimate of contract costs is 8,000. It will take three years to
build the bridge.

IG17. By the end of Year 1, the local body’s estimate of contract costs has
increased to 8,050.

IG18. In Year 2, the customer approves a variation resulting in an increase in
contract revenue of 200 and estimated additional contract costs of 150. At the
end of Year 2, costs incurred include 100 for standard materials stored at the
site to be used in Year 3 to complete the project.

IG19. The local body determines the stage of completion of the contract by
calculating the proportion that contract costs incurred for work performed to
date bear to the latest estimated total contract costs. A summary of the financial
data during the construction period is as follows:

Year 1 Year 2 Year 3
Initial amount of revenue agreed in contract 9,000 9,000 9,000
Variation _ 200 200
Total Contract Revenue 9,000 9,200 9,200

Contract costs incurred to date 2,093 6,168 8,200
Contract costs to complete 5,957 2,032 _

Total estimated contract costs 8,050 8,200 8,200
Estimated Surplus 950 1,000 1,000
Stage of completion 26% 74% 100%

138
Construction Contracts

IG20. The stage of completion for Year 2 (74%) is determined by excluding
from contract costs incurred for work performed to date the 100 for standard
materials stored at the site for use in Year 3.

IG21. The amounts of revenue, expenses and surplus recognised in the income
and expenditure in the three years are as follows:

To Date Recognised Recognised
in prior years incurrent year
Year 1
Revenue (9,000 x .26) 2,340 2,340
Expenses (8,050 x .26) 2,093 2,093
Surplus 247 247

Year 2
Revenue (9,200 x .74) 6,808 2,340 4,468
Expenses (8,200 x .74) 6,068 2,093 3,975
Surplus 740 247 493

Year 3
Revenue (9,200 x 1.00) 9,200 6,808 2,392
Expenses (8,200 x 1.00) 8,200 6,068 2,132
Surplus 1,000 740 260

Contract Disclosures

Appropriation/Aid Funded Contracts and Full Cost Recovery
Contracts

IG22. The Engineering and Public Works Department was recently created by
local body as the entity to manage the construction of major buildings and road
works for other government entities. It is funded predominantly by appropriation,
but with the approval of the Governing Board is empowered to undertake
construction projects financed by provincial or national or international aid
139
Compendium of ASLBs

agencies. It has its own construction capabilities and can also subcontract. With
the approval of the Governing Board, the Department may also undertake
construction work on a commercial basis for private sector entities and Public
Sector Undertaking (PSUs) and on a full cost recovery basis for state hospitals
and state run universities.

IG23. The Engineering and Public Works Department has reached the end of
its first year of operations. All its contract costs incurred have been paid for in
cash and all its progress billings (to aid agencies that have commissioned
construction work) have been received in cash. No advances to the Engineering
and Public Works Department for construction work were made during the period.
Contract costs incurred for contracts Band C include the cost of materials that
have been purchased for the contract but which have not been used in contract
performance to date. No commercial contracts have been undertaken this year.
(See below for examples of commercial contracts).

● Contract A is funded out of general appropriation revenue. (The contract
includes no “contract revenue” as defined).

● Contract B is with the Department of Education and the XX Aid Agency,
which is funding 50% of the construction costs. (50% of the contract cost
is to be reimbursed by parties to the contract and therefore is “contract
revenue” as defined).

● Contract C is totally funded by the National University. (The terms of the
arrangement specify that all of the contract costs be to be reimbursed by
the National University: from the University’s major construction fund.
Therefore, “contract revenue” as defined equals contract costs).

IG24. The status of the three contracts in progress at the end of Year 1 is as
follows:

Contract
A B C Total
Contract Revenue recognised in
accordance with paragraph 30 _ 225 350 575
Contract Expenses recognised in
accordance with paragraph 30 110 450 350 910

140
Construction Contracts

Contract Costs funded by
Appropriation 110 225 _ 335
Contract Costs incurred in the
period 110 510 450 1,070
recognised as expenses
(para 30) 110 450 350 910
recognised as an asset
(para 35) _ 60 100 160
Contract Revenue (see above) _ 225 350 575
Progress Billings (para 52) _ 225 330 555
Unbilled Contract Revenue _ _ 20 20
Advances (para 52) _ _ _ _

The amounts to be disclosed in accordance with the standard are as follows:

Contract revenue recognised as revenue in the period (para 50(a)) 575

Contract costs incurred to date (para 51(a)) (there are no
recognised surpluses/less recognised deficits) 1,070

Gross amount due from contract customers for contract work 150
(determined in accordance with paragraph 54 and presented
as an asset in accordance with paragraph 53(a)

The amounts to be disclosed in accordance with the standard are as follows:

Contract revenue recognised as revenue in the period
(para 50(a)) 575

Contract costs incurred to date (para 51 (a)) (there are no
recognised surpluses/less recognised deficits) 1,070

Gross amount due from contract customers for contract work
(Determined in accordance with paragraph 54 and presented
as an asset in accordance with paragraph 53(a) 150

141
Compendium of ASLBs

Amounts to be disclosed in accordance with paragraphs 51(a) and 53(a) are as
follows (Note: contract revenue for B is 50% of contract costs):

A B C Total
Contract costs incurred 110 510 450 1,070
Progress billings 0 225 330 555
Due from aid agencies and customers _ 30 120 150

IG 25. The amount disclosed in accordance with paragraph 51 (a) is the same
as the amount for the current period because the disclosures relate to the first
year of operation.

Commercial Contracts

IG26. The Special Division has been established within the Engineering and
Public Works Department of the local body to undertake construction work on a
commercial basis for Public Sector Undertaking (PSUs) and private sector entities
at the direction, and with the approval, of the Governing Board. The Special
Division has reached the end of its first year of operations. All its contract costs
incurred have been paid for in cash and all its progress billings and advances
have been received in cash. Contract costs incurred for contracts B, C and E
include the cost of materials that have been purchased for the contract but
which have not been used in contract performance to date. For contracts B, C
and E, the customers have made advances to the contractor for work not yet
performed.

IG27. The status of its five contracts in progress at the end of Year 1 is as
follows:

Contract
A B C D E Total

Contract revenue recognised
in accordance with paragraph 30 145 520 380 200 55 1,300

Contract expenses recognised
in Accordance with paragraph 30 110 450 350 250 55 1,215

142
Construction Contracts

Expected deficits recognised in
Accordance with paragraph 44 _ _ _ 40 30 70

Recognised surpluses less
recognised deficits 35 70 30 (90) (30) 15

Contract costs incurred in the
period 110 510 450 250 100 1,420

Contract costs incurred
recognised as contract
expenses in the period in
accordance with paragraph 30 110 450 350 250 55 1,215

Contract costs that relate to
future activity recognised as
an asset in accordance with
paragraph 35 _ 60 100 _ 45 205

Contract revenue (see above) 145 520 380 200 55 1,300

Progress billings (para 52) 100 520 380 180 55 1,235

Unbilled contract Revenue 45 _ _ 20 _ 65

Advances (para 52) _ 80 20 _ 25 125

The amounts to be disclosed in accordance with the Standard are as follows:

Contract revenue recognised as revenue in the period
(para 50(a)) 1,300

Contract costs incurred and recognised surpluses
(less recognised deficits) to date (para 51(a)) 1,435

143
Compendium of ASLBs

Advances received (para 51(b)) 125

Gross amount due from customers for contract work-presented
as an asset in accordance with paragraph 53 (a) 220

Gross amount due to customers for contract work-presented
as an asset in accordance with paragraph 53(b) (20)

The amounts to be disclosed in accordance with paragraphs 51(a), 53(a) and
53(b) are calculated as follows:

Contract
A B C D E Total

Contract costs incurred 110 510 450 250 100 1,420

Recognised surpluses less
recognised deficits 35 70 30 (90) (30) 15
145 580 480 160 70 1,435

Progress billings 100 520 380 180 55 1,235

Due from customers 45 60 100 _ 15 220

Due to customers _ _ _ (20) _ (20)

IG28. The amount disclosed in accordance with paragraph 51(a) is the same
as the amount for the current period because the disclosures relate to the first
year of operation.

144
Construction Contracts

Appendix 1
Note: This Appendix is not a part of the Accounting Standard for Local Bodies.
The purpose of this Appendix is only to bring out the major differences, if any,
between Accounting Standard for Local Bodies (ASLB) -11 and the corresponding
International Public Sector Accounting Standard (IPSAS) 11, ‘Construction
Contracts’.

Comparison with IPSAS 11, ‘Construction Contracts’

1. ASLB 11 uses different terminology, in certain instances, from IPSAS 11.
For example, the use of the term ‘income and expenditure account’ in
ASLB 11, for which equivalent term in IPSAS 11 is ‘statement of financial
performance’.

2. Paragraph 3 of IPSAS 11 which provides that Government Business
Enterprises should use IFRSs, has been deleted, as it is not relevant for
ASLB 11, which is applicable to Local Bodies of India. However, paragraph
number 3 is retained in ASLB 11, in order to maintain consistency with
IPSAS 11.

3. Paragraph 10A on the applicability of the Standard in case of ‘deposit
works’ has been included in the ASLB 11.

4. Additional commentary has been provided in paragraph 20 (a), to clarify
the applicability of the ASLB 11, in the context of local bodies.

5. IPSAS 11 requires contract revenue to be measured at fair value of
consideration received/receivable, whereas ASLB 11 requires that contract
revenue should be measured at consideration received/receivable.

6. Paragraphs relating to effective date have been removed as the ASLB 11
would become mandatory for Local Bodies in a state from the date
specified by the State Government concerned. Paragraph numbers have
been retained in order to maintain consistency with IPSAS 11.

145
Compendium of ASLBs

Appendix 2
Note: This Appendix is not a part of the Accounting Standard for Local Bodies.
The purpose of this Appendix is only to bring out the major differences, if any,
between Accounting Standard for Local Bodies (ASLB) -11 and the corresponding
existing Accounting Standard (AS 7) (revised 2002), ‘Construction Contracts’.

Comparison with corresponding existing Accounting
Standard (AS) 7 (revised 2002), ‘Construction Contracts’.

1. ASLB 11 as compared to AS 7 includes binding arrangements that do not
take the form of a legal contract within the scope of the Standard.

2. ASLB 11 includes non-commercial contracts within the scope of the
Standard whereas AS 7 does not deal with such contacts.

3. ASLB 11 includes additional examples as compared to AS 7, to illustrate
the application of the Standard to non-commercial construction contracts.

4. Different terminology is used in certain instances e.g., the term ‘Income
and Expenditure Account’ is used instead of ‘Profit and Loss Account’.

5. Paragraph 10A on the applicability of the Standard in case of ‘deposit
works’ has been included in the ASLB 11.

146