Income Computation Disclosure Standards - ICDS-3- Construction Contracts

ICDS

III - CONSTRUCTION CONTRACTS

Scope:

This ICDS is applied to determine the income of a construction contractor

Construction contracts - construction of single asset

- construction of a no.of assets closely interrelated in terms of

design,technology and function or ultimate use

Fixed price contract

Construction contacts Cost plus contract

Segmenting

Each asset of a contract treated as separate construction contract when:

· separate proposals submitted for each asset

· each asset is capable of separate negotiation (contractor and customer have option to accept or reject that part) AND

· cost and revenue of each asset is identifiable

Combining

Group of assets(with single customer or with several customers) will be treated as single construction contract when:

· group of contracts negotiated as single package

· contracts very closely interrelated (forming a single project with overall profit margin) AND

· contracts performed concurrently or in continuous sequence.

Construction of additional asset (at the customer's option or amendment to contract)

The construction of additional asset treated as separate construction contract when:

· asset differs significantly from asset of original contract(in terms of design,technology or function) OR

· price of new asset negotiated without regarding the original contact price

Contract revenue

Recognition - When there is reasonable certainty of its ultimate collection

Comprises of - initial agreed amount of contract (incl retentions) AND

- variations in contract work ,claims and incentive payments:

· to the extent its probable that it will result in revenue AND

· they are capable of being reliably measured

uncollectible contract revenue - contract revenue recognised as income

subsequently becomes uncollectible ,hence written off

recognisable as expense (NOT an adjst of contract revenue)

Contract Costs

Includes : cost for the period from the date of securing the contract to final completion of

the contract

cost of securing contract also included if:

· they are seperatly identifiable

· its probable that the contract shall be obtained

If cost incurred for securing contract recognised as expense - not included in contract cost if contract obtained in subsequent period

Comprises of :

· directly related to specific contract

· attributable and allocable in general

· specifically chargeable to customer under the terms of contract AND

· allocated borrowing cost as per ICDS IX

Cost shall be reduced by incidental income(not being interest ,dividends or capital gains ),not included in contract revenue

Costs not attributable or allocable to a contract -excluded from cost

Contract cost of future activity

Recognised as asset (amount due from customer)

Classified as contract work in progress

Recognition of contract revenue and expenses

· percentage completion method-recognised with respect to the stage of completion

of the contract activity at the reporting date

contract revenue matched with contract costs

incurred in reaching the stage of completion

resulting in

reporting of revenue , cost and profit attributable to

the work completed

Determination of stage of completion of contract

Determined with reference to:

· proportion of contract cost incurred for work performed to the estimated total contract cost, OR

· Surveys of work performed ,OR

· Completion of a physical proportion of the contract work

Progress payments and advances received from customers not determinative of stage of completion of contract

While determining stage of completion by reference to the contract costs incurred upto the reporting date,only those costs that reflect work performed are included in cost incurred upto reporting date.

Contract cost excluded-

· costs related to future activity

· payments made to sub contractors in advance of work performed

Early stage if contract outcome of contract cannot be estimated reliably

Contract revenue recognised only to the extent of costs incurred

Early stage of contract shall not extend beyond 25%of stage of completion

Changes in estimates

Percentage completion method applied current estimates of contract revenue and

Costs

Change in estimates

Changed estimates used for determination of

amount of revenue and expenses

In the period in which change is made and for

subsequent periods

Transitional Provisions

· Construction contracts commenced on or after 1.04.2016-.

contract revenue and cost recognisable as per

the provisions of this standard

· Construction contracts commenced on or before 31.03.2016 but not completed till date -

Contract revenue and cost recognisable based on the method regularly followed by the person prior to the previous years beginning on the 1st day of April 2016

Disclosure

A person shall disclose:

· amount of contract revenue recognised as revenue in the period AND

· methods used to determine the stage of completion of contracts in progress.

Disclosures regarding contracts in progress at the reporting date:

· Amount of costs incurred and recognised profits (less recognised losses) upto the reporting date

· the amount of advances received, AND

· the amount of retentions

AS

VII- CONSTRUCTION CONTRACTS

Point of differences :-

AS 7	ICDS 3
Real estate developers Doesn't deal with revenue of real estate developers	Silent on application
Contract cost Includes:- · direct cost · cost allocated to the contract. · Cost specifically charged to customer under the terms of the contract	Includes allocated borrowing cost in accordance with ICDS on borrowing cost
Contract revenue Recognised if it is possible to reliably estimate the outcome of the contract.	Recognised when there is reasonable certainty of its ultimate collection
Lays down the conditions to estimate the outcome of construction contract in case of fixed price contract and cost plus contract	ICDS is silent on the same
No quantitative threshold laid down for determining the stage of completion,untill when, the outcome of a contract cannot be reliably measured	Early stage of contract shall not exceed 25% of stage of completion- Only upto this stage ,contract revenue can be recognised to the extent of contract cost if the outcome of the contract cannot be reliably estimated
Retention money Contract revenue- initial amount of revenue agreed in the contract	Contract revenue- Initial amount + retentions
Incidental income (not included in contract revenue) Reduced from construction cost	Incidental income(not interest,divident or capital gains),that doesn't form part of contract revenue Reduced from contract cost Those,interest ,dividend and capital gains- taxed as income in accordance with applicable provisions of the act
Recognition of foreseeable losses Recognised immediately regardless of commencement or stage of completion	Doest permit recognition of foreseeable/expected losses
Recognition of incentive payments Recognised when · probability exits that specified performance would be met or exeeded · incentive is reliably measurable	Recognised under POCM if · incentive reliably measurable AND · it is probable that it would result in revenue
Recognition of claims Claims against customers recognised when: · probability exist that customer will accept the claim · amount reliably measurable	Recognised under POCM if · claims are reliably measurable AND · it is probable that it would result in revenue.

Contributed by Kashika Ahuja & Saino Susan at Sandeep Ahuja & Co

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Friday, July 14, 2017