The Determination of Contract Revenue and Expenses :
The following illustration illustrates one method of determining the stage of completion of a contract and the timing of the recognition of contract revenue and expenses (see paragraphs 21 to 34 of the Standard). (Amounts shown hereinbelow are in Rs. lakhs)
A construction contractor has a fixed price contract for Rs. 9,000 to build a bridge. The initial amount of revenue agreed in the contract is Rs. 9,000. The contractor’s initial estimate of contract costs is Rs. 8,000. It will take 3 years to build the bridge.
By the end of year 1, the contractor’s estimate of contract costs has increased to Rs. 8,050.
In year 2, the customer approves a variation resulting in an increase in contract revenue of Rs. 200 and estimated additional contract costs of Rs. 150. At the end of year 2, costs incurred include Rs. 100 for standard materials stored at the site to be used in year 3 to complete the project.
The contractor determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed upto the reporting 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 | 9000 | 9000 | 9000 |
| Variation | _— _ | _200_ | _200 |
| Total contract revenue | 9,000_ | 9200_ | 9200_ |
| Contract costs incurred upto the reporting 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 Profit | 950 | 1,000 | 1,000 |
| Stage of completion | 26% | 74% | 100% |
The stage of completion for year 2 (74%) is determined by excluding from contract costs incurred for work performed upto the reporting date, Rs. 100 of standard materials stored at the site for use in year 3.
The amounts of revenue, expenses and profit recognised in the statement of profit and loss in the three years are as follows:
| Recognised in Recognised in Prior years
Recognised in current year |
||
| Year 1 | ||
| Revenue (9,000x .26) | 2,340 | 2,340 |
| Expenses (8,050x .26) | 2,093 | 2,093 |
| Profit | _247 | _247 |
Year2
| Revenue (9,200x .74) | 6,808 | 2,340 | 4,468
|
| Expenses (8,200x .74) | 6,068 | 2,093 | 3,975
|
| Profit | 740 | 247 | 493 |
YEAR 3
| Revenue (9,200x .74) | 9,200 | 6,808 | 2,392 |
| Expenses (8,200x .74) | 8,200 | 6,068 | 2,132 |
| Profit | 1,000 | _740 | _260 |