1. Norlayalina
Adi Iskandar
Ruzzana
Construction Contract

2. Norlayalina
Adi Iskandar
Ruzzana
Construction Contract

3. CONSTRUCTION CONTRACT
A contract negotiated between parties of which,
generally the owner (or developer) and the
contractor of an asset (or group of interrelated
assets).

4. MFRS111
• Definition:
“Contract specifically negotiated for the
construction of an asset or a combination of
assets that are closely interrelated or
interdependent in terms of their design,
technology and function or their ultimate
purpose or use”

5. MFRS111
• Recognizing revenue under construction
contract
• Derived from the initial amount of revenue
agreed in the contract and variations in
contract work, claims and incentive payments
to the extent it is probable that they will result
in revenue and they are capable of being
reliably measured

6. MFRS111
• Issue – progress of a long-term project
• To determine the right timing to recognize
revenue
‘when the outcome of a contract can be
estimated reliably, revenue shall be
recognized by reference to the stage of
completion’

7. Long-Term Construction
Accounting Methods
1) Terms of contract must
be certain, enforceable.
2) Certainty of performance
by both parties
3) Estimates of completion
can be made reliably
1) To be used only when
the percentage method is
inapplicable [uncertain]
2) For short-term contracts
Percentage-of-Completion
Method
Completed Contract
Method
Revenue Recognition Before
Delivery

8. MFRS111
• Method:
1) Percentage of completion
- contract revenue is matched with the
contract costs incurred in reaching stage of
completion
- contract revenue recognized as revenue in
profit or loss in accounting period which
work is performed
- stage of completion determined by
reference to the contract costs that reflect to
the work performed incurred to date

9. PERCENTAGE OF COMPLETION
• Basis for revenue recognition in long-term
construction contracts – span over than one
accounting period
• Accountant need a basis to apportion the total
contract revenue between the multiple
accounting periods

10. PERCENTAGE OF COMPLETION
• Formula:
(i) Revenue recognized
(ii) Percentage of work complete
Percentage of Work Completed in the Period
Total Contract Value
Expenditures Incurred from Inception to Date
Total Estimated Costs for the Contract

11. Costs incurred to date = Percent complete
Most recent estimated total costs
1
Estimated total revenue x Percent complete
= Revenue to be recognized to date
2
Total revenue to be recognized to date less Revenue
recognized in PRIOR periods = Current period revenue
3
Current Period Revenue less current costs = Gross profit4
Percentage-of-Completion: Steps

12. Costs incurred to date = Percent complete
Most recent estimated total costs
1
Estimated total revenue x Percent complete
= Revenue to be recognized to date
2
Total revenue to be recognized to date less Revenue
recognized in PRIOR periods = Current period revenue
3
Current Period Revenue less current costs = Gross profit4
Percentage-of-Completion: Steps

13. PERCENTAGE OF COMPLETION
• The seller can recognize some gain or loss related
to a project in every accounting period in which
the project continues to be active
• Works best when it is reasonably possible to
estimate the remaining costs to complete a
project
• It should not be used if when there are significant
uncertainties about the percentage of completion
or the remaining costs to be incurred

14. PERCENTAGE OF COMPLETION
• Measurement:
1) Cost-to-cost method.
This is a comparison of the contract cost incurred to
date to the total expected contract cost. The cost of
items already purchased for a contract but which have
not yet been installed should not be included in the
determination of the percentage of completion of a
project, unless they were specifically produced for the
contract. Also, allocate the cost of equipment over the
contract period, rather than up-front, unless title to the
equipment is being transferred to the customer.

15. PERCENTAGE OF COMPLETION
2) Efforts-expended method.
This is the proportion of effort expended to
date in comparison to the total effort
expected to be expended for the contract. For
example, the percentage of completion might
be based on direct labor hours, or machine
hours, or material quantities

16. PERCENTAGE OF COMPLETION
3) Units-of-delivery method.
This is the percentage of units delivered to the
buyer to the total number of units to be delivered
under the terms of a contract. It should only be
used when the contractor produces a number of
units to the specifications of a buyer. The
recognition is based on:
– For revenue, the contract price of units delivered
– For expenses, the costs reasonably allocable to the
units delivered

17. PERCENTAGE OF COMPLETION
• The same measurement should be used for
similar types of contracts – improve
consistency of the method
• Commonly used – at least some indication of
economic activity that spills over into the
income statement prior to project completion

18. 2) Completed contract
- revenue and expenses are not recognized
until contract is completed and the title is
transfer to the client

19. COMPLETED CONTRACT
• Prior to completion, this method does not yield
any useful information for the reader of a
company’s financial statements.
• However, the delay in income recognition allows
a business to defer the recognition of related
income taxes.
• since revenue and expense recognition only
occurs at the end of a project, the timing of
revenue recognition can be both delayed and
highly irregular.

20. COMPLETED CONTRACT
• used under the following circumstances:
 When it is not possible to derive dependable
estimates about the percentage of completion
of a project; or
 When there are inherent hazards that may
interfere with completion of a project; or
 When contracts are of such a short-term
nature that the results reported under the
completed contract method and the
percentage of completion method would not
vary materially.

21. COMPLETED CONTRACT
• If there is an expectation of a loss on a
contract, record it at once even under the
completed contract method; do not wait
under the end of the contract period to do so.

22. Overview on New Proposed Standard
IFRS 15 “Revenue from Contracts with Customers”
The new standard in detail by Standard Setters and technical accountants
• The long awaited revenue recognition standard recently issued will have a
major impact for all firms and their advisers.
• ‘Walk through’ of the new revenue standard from experts involved in
its construction.
• The 5 steps for recognizing revenue from contracts with customers and
identify which contracts are within the scope of the new standard.
• Factors to consider when applying the new revenue standard
retrospectively and how the standard will affect client’s figures (including
reported profit/loss).
• How ‘variable consideration’ should be recognized.
• How to account for revenue from licenses, how credit risk affects
collectability and how this impacts on revenue recognition.

23. Revenue Recognition – New
1. Identify contracts with customer
2. Identify the separate performance
obligations within the contract
3. Determination of price
4. Allocation of price to separate performance
obligation
5. Recognize revenue upon satisfaction of
performance obligation

24. 1. Identify contract
• Various forms -> written, oral or implied
• All of these conditions must exist:
a. Commercial substance
b. Parties agreed to the provisions
and committed in satisfying their
obligations
c. Enforceable rights
d. Terms & payment methods

25. • Segmented or combined
To identify combined – entered
simultaneously, negotiated together, activities
are consequent or concurrent.
 To identify separated – goods purchased
separately, if bought together -> no discounts.
 Change orders? Separate or combined?
1. Identify contract

26. 2. Separate Performance Obligation
• If contract is more > 1 goods/services, then
each is a separate performance obligations
subject to:-
Another entity may provides similar
separately;
Goods can be sold off separately, distinct
function and margin

27. • Eg. Say, Construction > 3 years, can the design
service be treated as a separate performance
obligation?
2. Separate Performance Obligation
Design services are distinct and can be sold
separately, hence -> satisfy the criteria,
treated as separate Performance Obligation
What about buying of materials or
equipment?
Buying of materials/equipment – no real
Performance Obligation, thus to combined

28. • Site preparation?
• Actual construction? Construction
Management?
• Highly specialized interior build-out?
2. Separate Performance Obligation
o One PO – can be contracted separately, distinct profit
margin, high risk
o Treated as one PO as very interrelated although maybe
subcontracted. Difficult to separate risk between the
two.
o Regarded as separate, contracted separately distinct
profit margin

29. 3. Price determination
• Some are clearly stated, if for a fixed amount
• Some long term contract -> price may varies
due to performance incentives, liquidated
damage, change orders
• TO also consider -> collectability, non cash
consideration, PV
• What if the contract price is uncertain?

30. 4. Price Allocation
• Must reflect risk involved
• Price and allocation -> updated
throughout, instead of single gross
margin on the project

31. 5. Recognition – Performance
Obligation
• Amount of revenue = amount of price
allocated
• Cost -> charged to each PO as incurred
• Change of control – contract complete.
• Transfer of legal title? Contract complete?

32. 5. Recognition – Performance
Obligation
• Continuous transfer
• Output method – units delivered/produced,
milestone, engineering survey relative to total
goods/service
• Input method – effort expended relative to
total effort to be expended

33. • What if price changes after a performance
obligation was recognised?
• What if the developer and contractor is the
same party? How about the transfer of
control?
5. Recognition – Performance
Obligation
o The portion of price change attributable to the
PO can be recognized.
o Transfer of control may not be seen as taken
place. Recognised only once the contract is
completed

34. COMPLIANCE TO MFRS 111 BY
MALAYSIAN COMPANIES

35. Annual Report 2012

36. Annual Report 2012

37. Annual Report 2013

38. Annual Report 2012

49. INCONSISTENCIES IN DISCLOSURE
• Variation and claim
• Determining stage of
completion for long term
contract
• Disclosure of significant
judgment

51. ISSUE
• Halliburton-reported practice booking cost
overruns on construction project
• Raytheon - reported provide insufficient write
off for unexpected losses and booking
revenues from inactive long term contracts

52. FASB initiative to improve reporting by
• Eliminating inconsistencies of financial
reporting disclosure from long term contract.
• Provide guidance-not provide only basic
disclosures
• Standardization-opt for different progress
measurement method
• selecting input method rather than output
method

53. Reporting issues in construction
contract
• percentage of completion method over
completed contract method (whenever
possible)
• input method or output method
• Disclosure of revenue recognition policies
• Consideration to measure performance

54. Cost determination
• Input measures-based on effort and resources
applies
• Output measures-based on number of unit
completed ;
– Units of production method
– Units of delivery method