1.5 Scope
Construction contracts include:
q Services
related to the construction, such as project managers and architects.
q Contracts
for destruction, or restoration, of assets and the restoration of the
environment.
Example:
As
part of a new head office complex, you are building a new road. A clause in the
contract requires you to restore all grass areas beside the new road.
The
restoration is part of the contract.
Combining and Segmenting Construction
Contracts
When a contract covers more than a
single asset, the construction of each asset should be treated as a separate
contract when:
- Separate proposals have been submitted for each
asset;
- Each asset has been a separate negotiation and each
party could reject the part of the contract applying to that asset; and
- Costs and revenues of each asset can be measured.
Example:
You
have a master contract to build 80 branches for a retail banking operation over
a 2-year period, in different locations throughout the region.
The
cost for each branch is negotiated separately, and you receive a 10% profit,
based on the agreed cost for each branch.
Each
branch should be treated as a separate contract.
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Example:
Should
a contract for an asset’s construction and operation be accounted for as a
single contract or separate contracts?
Background
X
develops and sells computer software.
The sales take the form of a licence to use the software for a limited
period of time, and include after-sales support during the period of the
licence. The sales include a significant element of tailoring the basic
software to meet the client’s needs.
X
charges its clients a series of fees during the tailoring period. An
additional fee is charged at the start of the period of the licence once the
tailoring is complete and the client has accepted the software package. No
further amounts are payable during the licence period, either for the use of
the software or for the maintenance support.
X’s
management has questioned how the revenue from the contract should be
recognised.
Solution
Management
should account for the tailoring, the licensing and the maintenance support
as separate elements.
The
tailoring of the software should be accounted for as a construction contract
in accordance with the principles of IAS 11, and the fee for the use of the
software and the maintenance support should be recognised on a straight-line
basis over the period of the licence in accordance with IAS 18.
The
allocation of the total contract revenue between the tailoring service, the
right to use the software and the maintenance support should be made on the
basis of the fair value of the services. The allocation of the revenue based
on fair value is likely to differ from an allocation based on the billing
schedule.
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A
group of contracts, with one client or more, should be treated as a single
contract when:
- The contracts were signed as a single package;
- The contracts are so closely related that they are,
in substance, part of a single project with an overall profit margin: and
- The contracts are performed concurrently, or in a
continuous sequence.
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Example:
Should
a group of contracts with a single customer be accounted for as a single
contract or separate contracts?
Background
A
contractor is negotiating two contracts with a single customer. The customer must either accept both
contracts or reject both. The first
contract will be for the design of a computer centre and the second for the
plant’s construction. The planned
profit margin on the design contract is 20%, and the planned profit margin on
constructing the centre is 10%.
Solution
The
two contracts should be accounted for as a single contract.
The
contracts were negotiated as a single package; the client must accept both or
reject both. The contracts are closely related and will be performed in a
continuous sequence. An overall profit
margin should be recorded as work is performed on both contracts.
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Example:
You
have contracts to build a number of branches in shopping malls. Site preparation
is done by the client, and building costs are the same for each branch.
This
may be treated as a single contract.
A contract may provide for an
additional asset at the client’s option, or by way of an amendment. This will
be treated as an additional contract when:
- The
asset is fundamentally different from those included in the original
contract; or
2. The price of the new asset is
agreed without regard to the original contract price.
Example:
You
are building a retail branch, and your client asks you to build a transport
distribution centre in the grounds, at a price to be negotiated.
This
will be treated as an additional contract.
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