Accounting For Construction Contract - As7 (Revised-2002)

ACCOUNTING FOR CONSTRUCTION CONTRACT – AS7 (Revised-2002)
1) Applicability of the Standard
 Applied in accounting for construction contracts in the financial statements of

contractors.
 Where a Construction Contract

• is a contract specifically negotiated for the
• construction of an asset or combination of assets
• that are closely interrelated or interdependent
• in terms of their design, technology and function
• or their ultimate purpose or use.
and includes:
1) Contract for rendering of services which are directly related to the
construction of asset(e.g. Architect ).
2) Contract for destruction or restoration of assets, and the restoration of

environment following the demolition if asset.
 Construction Contract can be fixed price contract or a cost plus contract.
Contractor Agrees to a fixed Contract The Contractor is re-imbursed

Price or fixed rate per unit of output, for allowable or otherwise
Which in some cases is subject cost defined cost, plus % of these
Escalation. Cost or a fixed rates.
Notes:
Accounting for Construction Contracts-AS-7. Co-ordinator: CA Ashok Raghavan

Recognition of Revenue by Real Estate Developers-AS 9 Vs AS 7 Presenter : CA Vikas Oswal
2)
SEGMENTING AND COMBINING
(A) One contract (B) Many contracts
Single asset Many assets Additional asset
Separate Contract
Para 7 conditions to be satisfied Para 9 conditions to be satisfied

-separate proposal has been submitted
for each asset; - It differs significantly in design,
and technology or function
Each contract is subject to separate and
negotiation**; - Price is negotiated independently
and
Cost / revenue of each asset can be
identified.
Separate Contract Separate Contract

(B) Many contracts
Para 8 conditions
• Group of contracts is negotiated as a single package

and
• The contracts are closely interrelated.
and
• Contracts are performed concurrently or continuously.
Satisfied Not satisfied
Single contract Separate contracts
Notes:

3) Contract Revenue
Variation is an Instructions by the customer for a change in the scope or work to be

performed under contract.
Claim is an amount that the contractor seeks to collect from the customer or another
party as re-imbursements for the cost not included in the contract price.
Incentive payments are additional amounts payable to the contractor if specified

performance , standards are met or exceeded.
Notes:

4) Contract Cost:
Notes:

5)
Recognition of expenses /Losses
Expected losses
Treated
Recovery of costs not probable

As
Incomes not recoverable Expense

s
Costs incurred in securing the contract

Disclosure Requirements
• Amount of contract revenue recognised as P&L

Revenue in the period.
• Methods used to determine the contract
Revenue recognised in the period. Notes
• Methods used to determine the stage of Notes

completion of contracts in progress.
• for contracts in Progress B/sheet

a) Aggregate amount of costs incurred and Notes
recognised profits (less recognised losses)
upto the reporting date,
b) Amount of advances received, and
c) Amount of retentions
• Gross Amount due from (or) due to

customers for contract work - as an asset (or) B/sheet
liability
• contingencies in relation to warranty costs,
penalties or possible losses, as per as -29 B/sheet &
notes
NOTES :

Recognition of Revenue by Real estate developers AS-7 or AS-9
Guidance Note on recognition of revenue by Real Estate Developers recommends principles

for recognition of revenue arising from real estate sales by the enterprises engaged in such
activities (commonly referred to as ‘real estate developers’, ‘builders’ or ‘property developers’).
The term ‘real estate’ refers to land as well as building.
As per AS 9 : Revenue in case of real estate sales should be recognised when all the following
conditions are to be satisfied:
(i) The seller has transferred to the buyer all significant risks and rewards of ownership and the
seller retains no effective control of the real estate to a degree usually associated with
ownership;
(ii) no significant uncertainty exists regarding the amount of the consideration that will be
derived from the real estate sales; and
(iii) it is not unreasonable to expect ultimate collection.
In respect of recognition of revenue by the Real Estate company, the Expert Advisory
Committee notes paragraphs 10 and 11 of AS 9,which state as below:
"10.Revenue from sales or service transactions should be recognised when the

requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided
that at the time of performance it is not unreasonable to expect ultimate collection. If at
the time of raising of any claim it is unreasonable to expect ultimate collection, revenue
recognition should be postponed.
11.In a transaction involving the sale of goods, performance should be regarded as

being achieved when the following conditions have been fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price
or all significant risks and rewards of ownership have been transferred to the buyer and
the seller retains no effective control of the goods transferred to a degree usually
associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will
be derived from the sale of the goods."
The Expert Advisory Committee is of the view that revenue should be recognised by the
company in respect of its housing projects only when the conditions in respect of sale of goods
as aforesaid are satisfied.
Expert Advisory Committee is of the following opinion:
(a) The revised AS 7 would not be applicable to the company for accounting for new housing
projects which are undertaken by the company during the accounting periods commencing on
or after 1.4.2003.
(b) The activity of developing housing projects on its own account as a commercial venture by
the company is of the nature of production activity and,
therefore, should be construed as such. The inventories should be valued by the company in
accordance with AS 2 .
(c) AS 2 is relevant for valuation of inventories including construction work-in-progress and not
for recognition of revenue. AS 9 would be relevant for recognition of revenue.
References : Expert Advisory committee on important principles related to AS-7 & AS-9
Material Contracts: A Contract that is mainly for supply of materials with a

negligible element of service component should not be considered under AS – 7.
AS – 9 will be applicable for the supply and service components. (EAO 156 /
VOL XIX)
Consultancy Fees: Consultancy Fees received only for design engineering and
project management directly related to Construction of an asset should be
recognized as per AS – 7. If such revenue is not directly related to the
Construction of an asset, AS – 9 principles will be applicable. (EAO 20 / VOL
XXI)
Work-in-progress in a Consultancy Organization: AS – 7 would apply to revenue

recognition of consultancy fees received only in respect of those service
contracts which are directly related to the construction of an asset, and revenue
should be recognized in the manner set out in AS – 7. If the consultancy services
do not relate to construction of assets, then revenue should be recognized as set
out in AS – 9. (MARCH 06 – CA JOURNAL PAGE NO.1350)
Notes:


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ACCOUNTING FOR CONSTRUCTION CONTRACT – AS7 (Revised-2002)

1) Applicability of the Standard

 Applied in accounting for construction contracts in the financial statements of

 Where a Construction Contract

2) Contract for destruction or restoration of assets, and the restoration of

 Construction Contract can be fixed price contract or a cost plus contract.

Contractor Agrees to a fixed Contract The Contractor is re-imbursed

Accounting for Construction Contracts-AS-7. Co-ordinator: CA Ashok Raghavan

(A) One contract (B) Many contracts

Single asset Many assets Additional asset

Para 7 conditions to be satisfied Para 9 conditions to be satisfied

Separate Contract Separate Contract

Accounting for Construction Contracts-AS-7. Co-ordinator: CA Ashok Raghavan

• Group of contracts is negotiated as a single package

Satisfied Not satisfied

Single contract Separate contracts

Accounting for Construction Contracts-AS-7. Co-ordinator: CA Ashok Raghavan

Variation is an Instructions by the customer for a change in the scope or work to be

Incentive payments are additional amounts payable to the contractor if specified

Accounting for Construction Contracts-AS-7. Co-ordinator: CA Ashok Raghavan

Accounting for Construction Contracts-AS-7. Co-ordinator: CA Ashok Raghavan

Recognition of expenses /Losses

Recovery of costs not probable

Incomes not recoverable Expense

Accounting for Construction Contracts-AS-7. Co-ordinator: CA Ashok Raghavan

• Amount of contract revenue recognised as P&L

• Methods used to determine the stage of Notes

• for contracts in Progress B/sheet

• Gross Amount due from (or) due to

Accounting for Construction Contracts-AS-7. Co-ordinator: CA Ashok Raghavan

Guidance Note on recognition of revenue by Real Estate Developers recommends principles

The term ‘real estate’ refers to land as well as building.

(iii) it is not unreasonable to expect ultimate collection.

"10.Revenue from sales or service transactions should be recognised when the

11.In a transaction involving the sale of goods, performance should be regarded as

Expert Advisory Committee is of the following opinion:

Material Contracts: A Contract that is mainly for supply of materials with a

Work-in-progress in a Consultancy Organization: AS – 7 would apply to revenue

Accounting for Construction Contracts-AS-7. Co-ordinator: CA Ashok Raghavan

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