IAS 11 Construction contracts - basic ideas

This standard seems to be complicated, but if you know the concept then it should be easy to handle. It follows accrual basis of accounting so although money is received in progress payments, you should recognise revenue earned in the period.

Recognition of revenue and cost
They are recognised when it is probable that economic benefits attached to the contract will flow to the entity and outcome can be measured reliably.

Stage of completion
This can be calculated either using revenue basis (work certified to date/contract price) or cost basis (cost to date/estimated total cost). If you are using revenue basis, revenue to be recognised in the period is equal to the work certified to date and if you use cost basis, cost of sales to be recognised in the period is equal to the cost incurred to date.

Steps of accounting
1. Determine profit or loss - this can be found by contract price - estimated total cost. Estimated total cost includes any contract cost incurred to date - estimated further cost to complete the contract. If it results in loss, then you don't need to calculate stage of completion of the contract because loss must be recognised in full as a gross loss.
2. Determine stage of completion and profit to recognise - use the stage of completion calculated and multiply by the estimated profit in step 1, that will be the gross profit.
3. Determine amount due from customers (current asset) - this is calculated from cost to date + profit recognised (from step 2) - progress payment. The idea is that cost + profit is the price that customer should pay, then less the progress payment will arrive at the amount that customer is still owing to us. If it is a negative figure, then it should be a current liability (amount due to customer).
4. Prepare income statement and statement of financial position. The trick is that let say you use revenue basis to calculate stage of completion and then profit to be recognised, you know that the revenue to be recognised is equal to work certified to date, therefore with both revenue and gross profit amount, the balance is cost of sales.

More complicated issue is discussed later.