Long-Term Construction Contracts PDF

03 Long-Term Construction Contracts AFAR By CSD AFAR BY CSD AFAR BY CSD Long-Term Construction Contracts Construction Contracts Type of Construction Contracts...

03 Long-Term Construction Contracts AFAR By CSD AFAR BY CSD AFAR BY CSD Long-Term Construction Contracts Construction Contracts Type of Construction Contracts Design and technical assistance costs LONG-TERM CONSTRUCTION CONTRACTS A contract specifically negotiated for the 1. Fixed price contract directly related to the contract construction of an asset/combi of assets Fixed price or fixed rate per output Estimated costs for rectification, that are closely interrelated/ Escalation clauses guarantee work, expected warranty costs interdependent 2. Cost plus contract Claims from third parties for a substantial asset like a bridge, a a. Cost + variable fee building, an aerospace, a dam, a ship, or a b. Cost + fixed fee General Costs Attributable to Contract tunnel Activity: Contract Revenues Insurance Recognition: Either Total amount of consideration receivable Design and technical assistance costs not At a point in time (one-time at the end) directly related to a specific contract Over-time (spread); or Agreed variation (increase/decrease) Construction overheads Cost escalation (increase) Revenue is recognized over time if any one Penalties (decrease) Other Costs Chargeable to the Customer of the following criteria is met: Number of units (increase/decrease) Under Contract Terms: The customer CONSUMES the benefit of General administration costs (if the seller's work as it is performed. Construction Costs reimbursable under the contract) The customer CONTROLS the asset as it Direct Costs Related to the Specific Research and development costs (if is created or enhanced. Contract: reimbursable under the contract) The seller is creating an asset with NO Site labor costs, including supervision Depreciation of idle plant and equipment ALTERNATIVE USE to the seller Costs of materials used in construction not used on any specific contract Depreciation of plant, equipment used Cost of wasted materials, labor, etc. Revenue is then recognized in proportion to Costs of moving plant, equipment, and Costs related to satisfied PO the amount of the performance obligation materials to/from the site that has been satisfied (if measurable). Hiring costs for plant and equipment AFAR BY CSD AFAR BY CSD Long-Term Construction Contracts Contract Costs RECOGNITION METHODS Either: LONG-TERM CONSTRUCTION CONTRACTS 1. Incremental costs I. Over-time or Percentage of Completion 1. Input methods (if silent) If not obtained: no incurred ✓ – 1. Input methods (if silent) a. Cost-to-cost method: capitalize cost of obtaining contract a. Cost-to-cost method (incurred) If redeemable: A – recognized as b. Efforts expended method (labor cost incurred to date asset hours, materials used, etc.) total expected costs If incurred regardless: X – expensed 2. Output methods 2. Costs to fulfill a contract direct measurements of value b. Efforts expended method Can fall w/in scope of other transferred (e.g., milestones standards achieved, units produced) units (hours, kg, ft, etc.) Recognized as assets (if all ✓) total units ✓ directly related to the contract II. At a Point in Time or Cost 2. Output methods ✓ generate/enhance asset Recovery/Zero Profit Method ✓ recoverable Used when it is not possible to reliably output (units produced, etc.) estimate the outcome of the contract; total output Notes: revenue is recognized only to the extent Supplies not yet used but no alternative of costs incurred that are expected to be use = ✓ added to cost incurred to date recoverable. Incremental income = (−) reduction to cost AFAR BY CSD AFAR BY CSD Journal Entries Accounts used in LTCC: LONG-TERM CONSTRUCTION CONTRACTS 1. Construction in Progress (CIP) account 2. Progress Billings account -or- Construction in Progress Debit Credit Contract Account 3. Contract Account *assumed amounts Construction in Progress 500 Contract Account 500 Cash 100 Cash 100 A/P 250 A/P 250 etc. 150 etc. 150 To record costs incurred To record costs incurred Construction in Progress 200 Contract Account 200 Construction Expenses 500 Construction Expenses 500 Revenue from Construction 700 Revenue from Construction 700 To recognize gross profit in CIP account To recognize gross profit in CIP account Progress Billings Accounts Receivable 650 Accounts Receivable 650 Progress Billings 650 Contract Account 650 To record billings to customer To record billings to customer Figure 4: Contract Asset or Liability Assuming, the progress billings is 760: In the Current Asset section of the Balance Sheet: In the Current Liability section of the Balance Sheet: Construction in Progress 700 Progress Billings 760 Less: Progress Billings 650 Less: Construction in Progress 700 Contract Asset 50 Contract Liability 60