IAS 11 Contruction contracts - advanced

Two issues to look at are the unplanned rectification costs and when we are not in the first year of contract.

Unplanned rectification cost
When there is such cost exist, it should be recognised in full in the income statement. This is because the cost is not originally estimated so what we do is to deduct the gross profit to be recognised in the period.

We are not in the first year of contract
You should understand that income statement only shows figures in an accounting period, ie. 12 months while statement of financial position shows the balance to date (therefore the amount is accumulated). Therefore, we have a problem, in the second year of contract for example, you should only show the 12 months revenue, cost of sales and gross profit in the income statement. However, the one who certifies the work will only be able to identify the sale value of work done to date, he can't determine exactly how much of work certified is for the 12 months. What we can do is to follow the steps as normal, then take the revenue/cost of sales/gross profit less the last year balance, with this we can identify the amount for current period (12 months). Do not confuse with the revenue/cost of sales/gross profit in the income statement, here I am referring to those relating to the contract only.

You will need to practice some questions to understand what I have just said here, June 2011 question 5 would be a good question to try.