ICDS III – Construction Contracts

Scope

To be applied in determination of income for a construction contract of a “contractor”

 

Definitions:

Construction contract : is a contract specifically negotiated for the construction of an assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes:

(i)                  Contract for rendering of services which are directly related to the construction of the asset.

(ii)                Contract for destruction or restoration of assets, and the restoration of the environment following the demolition of assets.

Fixed Price Contract : Contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which may be subject to cost escalation clauses.
Cost plus contract : Contract in which contractor is reimbursed for allowable or otherwise defined costs, plus a mark up on these cost or a fixed fee
Retentions: Are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for payment of such amounts or until defects have been rectified.
Progress billings :  are amounts billed for work performed on a contract whether or not they have been paid by the customer.
Advances : are amounts received by the contractor before the related work is performed.

Applicability of ICDS

ICDS 3 shall be applied separately to each construction contract Except in following cases:

Contract Revenue Recognition:

·         Revenue to be recognised when there is certainty of its ultimate collection

·         Shall comprise of:

(i)                  Initial amount agreed in the contract, including retentions

(ii)                Variations in the work, claims and incentive payments.

·         When revenue recognised in the previous computation, becomes uncollectible and hence written off, the same should be treated as expense and not reduced from revenue.

 

Contract Cost:

·         Shall comprise of:

(i)                  Cost that relate directly to the specific contract;

(ii)                Costs that are attributable to contract activity in general and can be allocated to the contract;

(iii)               Such other costs as specifically chargeable to the customer under the terms of the contract; and

(iv)               Allocated borrowing costs according to ICDS IX

 

These costs shall be reduced by any incidental income, not being in the nature of interest, dividend or capital gains, that is not included in contract revenue.

 

·         Exclusions:

(i)                  Cost not attributable to contract activity or cannot be allocated to contract

(ii)                Contract costs of future activity on the contract are recognised as Work in progress (Asset)

(iii)               Cost incurred for securing the contract are included in cost provided

(a)    They can be separately identified

(b)    It is probable that the contract shall be obtained.

When the above mentioned cost are recognised as a expense in the period in which they are incurred, they cannot be included in the contract cost in subsequent period when the contract is obtained.

 

When to recognise revenue and expense?

The recognition of revenue and expense should be according to percentage completion method (i.e. stage of completion method)

ICDS 3

Note:

  1. Progress payments and advances received from customers are not determinative of the stage of completion.
  2. Changes in estimates : As the percentage of completion method is applied on cumulative basis in each previous year to the current estimates of contract revenue and costs, when there is a change in estimates, the changed estimates shall be used in determination of the amount of revenue and expenses in the period in which the change is made and in subsequent period.

 

*While considering the proportion of costs incurred till reporting period to the estimated total costs following costs are not to be considered:

(a) costs that relate to future activity

(b) advances made to subcontractors.

Disclosures

·         Amount of contract revenue recognised

·         Method used to determine the stage of completion of contract in progress

·         Amount of costs and profits recognised

·         Amount of advances received

·         Amount of retentions

 

Key Difference with AS 7

  •   AS 7 does not provide for any specific treatment for retention money, however ICDS provides that retention money be treated as contract revenue and are to be recognised for percentage of completion.
  •   AS does not provide for the accounting of preconstruction income
  •   AS provides for recognition of foreseeable losses immediately as an expense, whereas ICDS provides for recognising losses only to the extent of percentage of completion.

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