For accounting and financial reporting purposes, construction contracts mean destruction or restoration of items and the restoration of the environment following the demolition of items. For example, construction of an item such as a bridge, building, dam, pipeline, road, ship or tunnel.
Construction contracts also include rendering of services, which are directly related to the construction of an item, for example, a contract for a contractor to provide project management and architectural services.
Coping with the increasingly complex reporting requirements such as Australian Accounting Standard AASB 1009, which prescribes the accounting and reporting requirement for construction contracts is difficult. We can assist you to comply.
The Standard has a direct impact on any contractor who builds structures, constructs facilities, produces goods or renders services to the specifications of another entity. The term contractor includes a general or prime contractor, a subcontractor to a general contractor or a construction manager.
Under this method, revenue and expenses arising from a construction contract are recognised in the financial years in which the construction activities are performed.
The recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage of completion method.
The stage of completion of a construction contract may be determined in a variety of ways. The contractor uses the method that measures reliably the work performed. The methods may include determining the proportion that contract costs for work performed to date bear to the estimated total contract costs, surveying work performed, or determining the proportion that physical contract work completed to date bears to the estimated total physical contract work.
Where the outcome of a construction contract can be estimated reliably, revenue and expenses arising from the contract must be recognised in the profit and loss account by reference to the stage of completion of the contract as at reporting date.
Where it is probable that total contract costs will exceed total contract revenue for a contract, the excess of costs over revenue is recognised as an expense immediately. The percentage of completion method provides useful information on the extent of construction activity and performance during a financial year.
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