The accounting treatment of the construction contract will depend on the extent to which the performance of the contract can be estimated.
If the outcome of the construction contract can be reliably estimated, the entity should recognise contract revenue and expenses associated with the construction contract as revenue and expenses by reference to the percentage of completion method at the end of the reporting period.
The percentage of completion method requires management to employ a method of estimating how much of a contract has been completed at the end of the reporting period. The most common methods include;
Where the entity receives advance payments for work not yet performed then this should be adjusted for when calculating the percentage of work completed.
If the outcome of the construction contract cannot be estimated reliably then the entity should recognise revenue only to the extent of contract costs incurred that it is probable will be recovered. The entity should recognise contract costs as an expense in the period in which they are incurred.
If it is probable that the construction contract will make a loss then the expected loss should be recognised immediately as an expense with a corresponding provision for an onerous contract. If an amount previously recognised as revenue is no longer payable then this should be recognised as an expense rather than as an adjustment to revenue.
The following disclosures are required in relation to construction contracts.
In addition, the entity should present amounts due from customers for contract work and amounts due to customers for contract work separately as assets and liabilities respectively.
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