Friday, July 14, 2017

Income Computation Disclosure Standards - ICDS-3- Construction Contracts



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


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


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 revenuecontract 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

                                                                             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


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





Point of differences :-

AS 7
Real estate developers
Doesn't deal with revenue of real estate developers

Silent on application
Contract cost
·         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