Financial Reporting Standard 11: Construction Contracts
The properties of construction contracts might make it tough for you when preparing financial statements. The FRS 11 prescribes the accounting procedures of revenue and costs along with construction contracts. The Framework for the Preparation of Financial statements (Also see FRS 8 and FRS 10) is used in reporting the income and expenses in construction contracts.
A construction contract covers several assets. Based on FRS 11, the contract for each asset is regarded as an individual contract when:
- Each asset is based on separate negotiation. The contractor and the customer have to agree to exclude the part of the agreement that reveals the relationship between the assets
- A proposal for each asset agreement was submitted independently
- The costs and revenues for each asset can be specified
For a group of construction contracts, with numerous consumers or single customer will be viewed as a single contract when:
- The agreements are closely related
- The customer and the contractor negotiate the agreements as a single package
- The agreements are done simultaneously
The FRS 11 provides guides about the extra assets in the construction contracts and shows the conditions of additional asset construction to be a separate construction contract.
According to FRS 11, contract revenue (Also see How to Determine Revenue – Financial Reporting Standard 18) consists of the initial quantity agreed in the agreement, claims, the variations in agreement work and incentive payments. In agreements, variation is a circumstance where your customer needs a modification in the scope of the agreement. This can lead to either rise or drop in the contract revenue that is taken up the similar way accrued revenue does.
Contrarily, miscellaneous claim is the figure that the contractor wants to collect from your customer as repayment for expenses that are not in the agreement price. You have to determine the value of contract revenue in regards to the fair value of the consideration obtained.
The contract costs include:
- Expenses that attributed to the agreement activity and can be allocated to the particular agreement
- All costs that directly associate with the agreement
- Other expenses that are specifically chargeable to your customer under the agreement
The FRS 11 specifies different categories of expenses involved in agreements and shows a clear guideline on how these incomes and costs need to be recognised in the Income Statement (Also see Accounting – The Most Important Part Of The Income Statement). You may contact any accounting firm in Johor Bahru to know more about how to follow FRS 11 when preparing construction contracts.