Presentation on as 7 and 9
- 2. ACCOUNTING STANDADS 7 AND 9 Issued by the ICAI
- 4. WHY AS-7 Construction is a lengthy process, and spreads over multiple accounting years. Creates a problem in recognizing the revenue and cost of the current accounting period
- 5. PARA 2.1 “A construction contract is a 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.” What is a Construction Contract?
- 6. Contracts for rendering of services E.g., architect or engineer Commenced and completed within the same accounting year Construction contracts under AS -7 Contracts for destruction or restoration of assets and the restoration of the environment following the demolition of assets
- 7. Combining and Segmenting Construction Contracts Segmenting Construction Contracts when Separate proposals have been submitted Costs and revenues separately identifiable Separate negotiation for each asset contractor or contractee able to accept or reject part of the contract
- 8. Why Segmenting of construction contracts? Contract A Contract B Total Revenue –Rs 2,00,000 Cost Incurred - Rs 40,000 Total Cost (estd.) - Rs 1,00,000 Cost Incurred – 40% Total Revenue –Rs 3,00,000 Cost Incurred - Rs 1,20,000 Total Cost (estd.) - Rs 2,00,000 Cost Incurred – 60% Revenue to be recognised Rs 2,00,000*40% = Rs 80,000 Revenue to be recognised Rs 3,00,000*60%=Rs 1,80,000 Total revenue recognised = Rs 2,40,000
- 9. Contract A & B combined Total Revenue – Rs 5,00,000 Total Cost Incurred - Rs 1,60,000 Total Estimated Cost - Rs 3,00,000 Cost Incurred – 53.33% Revenue to be recognised Rs 5,00,000*53.33% = Rs 2,66,650 Difference (revenue higher by) = Rs 26,650
- 10. ADDITIONAL ASSET Significant Change in design Change in technology/ Functioning of the asset Price negotiated irrespective of original contract price Treat separately, if:-
- 12. REVENUE • Price contracted + / - Variations in contract • Claims • Incentives payment (measurable & probable) COST • Directly related to contract • Proportionate cost recognized to proportionate contract activity • Reimbursable by customer
- 13. When Outcome can be estimated • Para 21: “……contract revenue and contract costs associated with the construction contract should be recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss should be recognized as an expense immediately in accordance with para 35”. When Outcome cannot be estimated • As per para 31, contract costs should be recognised as an expense in the period in which they incur and contract revenue to the extent of costs recoverable Percentage Completion Method
- 14. Survey Method Proportion of cost incurred to total cost Completion of a physical proportion of the contract work Any other suitable method Calculation of degree of completion
- 15. General Revenue recognised Method of recognition Method for degree of completion For contracts in progress Costs and profits recognised Creditors Debtors Revenue recognised, not billed Gross Debtors Amount billed not recognised as revenue Gross Creditors
- 17. Revenue includes •Sale of goods •Rendering of services, and •Interest, royalties and dividend income in the ordinary course of business.
- 18. Revenue does not include Revenue from construction activities AS 7 Lease income and income from HP AS 19 Incomes of insurance companies arising under insurance contracts Income from government grants AS 14 Inter divisional transfers
- 19. Conditions for recognition of revenue Sale of goods Rendering of services Interest, royalties and dividend income Specific conditions Measurable Collection is probable
- 20. Sale of Goods Revenue recognised only when:- 1. Property in goods is transferred 2. Transfer against consideration 3. Significant risks and rewards of ownership are also transferred
- 21. Revenue by rendering of Services completed service contract method Service under contract is complete:- 1. Fully or 2. Substantially Proportionate completion method For service involving execution of more than one act Recognize 100% of the amount as revenue Recognize proportionately, preferably SLM
- 22. Interest • Charges for the use of cash resources Royalty • Income from lending of intangible assets Dividend • Reward from holding of investments in shares
- 23. Interest Royalty Dividend Determined by the amount outstanding and rate applicable Basis the terms of the relevant agreement When right to receive payment is established
- 24. AS 7 by ICAI AS by NACAS AS 9 by ICAI ASI 14 by ICAI AS by NACAS
Editor's Notes
- #4: Change pic