{"id":24182,"date":"2021-11-11T05:46:02","date_gmt":"2021-11-11T05:46:02","guid":{"rendered":"https:\/\/www.legalraasta.com\/blog\/?p=24182"},"modified":"2021-11-11T05:46:02","modified_gmt":"2021-11-11T05:46:02","slug":"as-7","status":"publish","type":"post","link":"https:\/\/www.legalraasta.com\/blog\/as-7\/","title":{"rendered":"AS 7 \u2013 Construction Contracts"},"content":{"rendered":"<p>AS 7 Construction Contract defines and specifies the accounting treatment of revenue and expenditures associated with a construction contract. Construction contracts have to be accounted for in the financial statements of the contractors using <strong><a href=\"https:\/\/www.legalraasta.com\/blog\/ind-as-115\/\">Accounting Standard<\/a><\/strong> 7 Construction Contract.<\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_73 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Different_Types_Of_Contracts\" title=\"Different Types Of Contracts\">Different Types Of Contracts<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Contract_with_a_Fixed_Price\" title=\"Contract with a Fixed Price\">Contract with a Fixed Price<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Contract_with_a_cost-plus_provision\" title=\"Contract with a cost-plus provision\">Contract with a cost-plus provision<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Construction_Contracts_Combining_and_Segmenting\" title=\"Construction Contracts: Combining and Segmenting\">Construction Contracts: Combining and Segmenting<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Revenue_from_a_Contract\" title=\"Revenue from a Contract\">Revenue from a Contract<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Contractual_Costs\" title=\"Contractual Costs\">Contractual Costs<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Revenue_and_Cost_Recognition_from_a_Contract\" title=\"Revenue and Cost Recognition from a Contract\">Revenue and Cost Recognition from a Contract<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Determination_of_the_completion_stage\" title=\"Determination of the completion stage\">Determination of the completion stage<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Expected_Losses_are_Recognized\" title=\"Expected Losses are Recognized\">Expected Losses are Recognized<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Disclosures_required_in_financial_statements\" title=\"Disclosures required in financial statements:\">Disclosures required in financial statements:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/#Differences_between_Indian_Accounting_Standards_IAS_11_and_AS_7\" title=\"Differences between Indian Accounting Standards (IAS) 11 and AS 7\">Differences between Indian Accounting Standards (IAS) 11 and AS 7<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"Different_Types_Of_Contracts\"><\/span><strong>Different Types Of <\/strong><strong>Contracts<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A construction contract is one that is entered into expressly for the building of an asset or a group of assets that are tightly linked or interdependent in terms of technology, design, function, or the nature of its final purpose or use.<\/p>\n<ul>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"Contract_with_a_Fixed_Price\"><\/span><strong>Contract with a Fixed Price<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p>A contract in which the contractor and the client agree on a set price for the project. In rare situations, the contract may include a cost escalation provision that is mutually agreed upon by both parties. For example, the parties agree to insert a condition in the contract that allows them to change the contract price if the cost of raw materials rises.<\/p>\n<ul>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"Contract_with_a_cost-plus_provision\"><\/span><strong>Contract with a cost-plus provision<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p>A contract in which the contractor is reimbursed for expenses incurred or agreed upon, as well as a fixed proportion of these expenses.<\/p>\n<ul>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"Construction_Contracts_Combining_and_Segmenting\"><\/span><strong>Construction Contracts: Combining and Segmenting<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<\/li>\n<\/ul>\n<p style=\"padding-left: 40px;\"><strong>&#8211; Construction Contract Combination<\/strong> \u2013 When a group of contracts, either with one or more clients, are negotiated as a single package, are interconnected and constitute part of a single project, and are completed in a continuous sequence, they have termed a single construction contract.<\/p>\n<p style=\"padding-left: 40px;\">A contract for the construction of three similar structures (in every way) on a single plot, for example, maybe arranged all at once.<\/p>\n<p style=\"padding-left: 40px;\"><strong>&#8211; Construction Contract Segmentation<\/strong> \u2013 When a contract includes more than one asset, each asset&#8217;s construction should be treated as a separate construction contract if separate proposals have been submitted for each asset, each asset has been separately negotiated, and each asset&#8217;s costs and revenues can be identified separately.<\/p>\n<p style=\"padding-left: 40px;\">For example, a contract for the construction of three separate structures on the same site, each with its own set of specifications, is negotiated separately with the contractor.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Revenue_from_a_Contract\"><\/span><strong>Revenue from a Contract<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>To the extent that it is likely to generate income and is measurable, contract revenue includes the following:<\/strong><\/p>\n<ul>\n<li>The contract&#8217;s agreed-upon initial income amount;<\/li>\n<li>Claims and incentives based on contract work changes;<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Contractual_Costs\"><\/span><strong>Contractual Costs<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>The following items are included in the cost of a contract:<\/strong><\/p>\n<ul>\n<li>Costs that are directly tied to the specific contract<\/li>\n<li>Costs that are attributed and assigned to contract activities in general<\/li>\n<li>Any other charges that are specifically charged to the client under the contract&#8217;s conditions.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Revenue_and_Cost_Recognition_from_a_Contract\"><\/span><strong>Revenue and Cost Recognition from a Contract<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When the result or outcome of a construction contract may be forecasted, the relevant contract revenue and contract costs must be recognized based on the contract&#8217;s current level of completion. Expected losses must be recorded as expenses right away.<\/p>\n<p><strong>I. In the case of a fixed-price contract, the outcome can be reliably estimated if all of the following conditions are met:<\/strong><\/p>\n<p>1. The whole revenue from a contract can be accurately calculated.<\/p>\n<p>2. It is obvious that the financial benefits of such a contract will accrue to the company.<\/p>\n<p>3. Both contract expenses and contract completion status can be calculated.<\/p>\n<p>4. Contract expenses can be readily defined for a cost comparison with previous estimates<\/p>\n<p><strong>II. When all of the following conditions are met in the case of a cost-plus contract, the outcome can be reliably estimated:<\/strong><\/p>\n<p>1. The contract&#8217;s financial gains are likely to accrue to the organization.<\/p>\n<p>2. The contract costs that are related to the contract can be readily identified and measured.<\/p>\n<p><strong>III. Percentage of completion method &#8211; This technique specifies how income and costs are recognized based on the contract&#8217;s stage of completion. Revenue and cost are recognized in the profit and loss statement in the accounting periods in which the job is completed using this technique.<\/strong><\/p>\n<p><strong>IV. Contract work-in-progress costs \u2014 A contractor may incur costs related to future contract activity. If it is likely that such costs will be recovered, they are recorded as an asset.<\/strong><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Determination_of_the_completion_stage\"><\/span><strong>Determination of the completion stage<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A contract&#8217;s state of completion can be determined in a variety of ways. <strong>The following approaches may be used, depending on the nature of the contract:<\/strong><\/p>\n<ul>\n<li>The proportion of contract costs incurred compared to the total projected contract costs; (for example, if the total contract cost is Rs. 30 lakhs and the costs incurred to date are Rs. 15 lakhs, the stage of completion is considered 50% complete, or 15 lakhs \/ 30 lakhs).<\/li>\n<li>Work-in-progress surveys; for example: in a contract for construction of a bridge, the site inspector can do a survey and with regards to the technicalities of the project, inform how much work has been completed<\/li>\n<li>Physical completion of contract work for example, in a contract for the construction of a five-story structure, if three stories are completed, the stage of completion is 6%, or 3 stories\/5 stories.<\/li>\n<li>When the outcome of a construction contract cannot be predicted, income and cost should only be recognized to the extent that contract costs incurred are likely to be recovered.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Expected_Losses_are_Recognized\"><\/span><strong>Expected Losses are Recognized<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When overall contract costs are likely to exceed total revenue from a contract, the expected losses should be reported as expenses as soon as possible. <strong>Regardless of the following, the number of such losses must be determined:<\/strong><\/p>\n<ul>\n<li>The work has commenced on the contract or not<\/li>\n<li>The completion stage<\/li>\n<li>The estimated number of earnings from other contracts, which are subdivided as previously mentioned.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Disclosures_required_in_financial_statements\"><\/span><strong>Disclosures required in financial statements:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>1. An organization should make the following disclosures:<\/strong><\/p>\n<ul>\n<li>Revenue from contracts recognized during the <a href=\"https:\/\/www.legalraasta.com\/blog\/accounting-cycle-guide\/\">accounting period<\/a><\/li>\n<li>The methodologies for calculating contract revenue recognized during the period<\/li>\n<li>The procedures for determining the state of fulfillment of ongoing contracts.<\/li>\n<\/ul>\n<p><strong>2. At the reporting date, the following disclosures on contracts in progress must also be made:<\/strong><\/p>\n<ul>\n<li>The total amount of money spent and the amount of money made.<\/li>\n<li>The number of advances received<\/li>\n<li>The amount of retained earnings<\/li>\n<\/ul>\n<p><strong>An organization should exhibit the following:<\/strong><\/p>\n<ul>\n<li>As an asset, the gross amount payable from consumers for contract work;<\/li>\n<li>As a liability, the gross sum is payable to customers for contract work.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Differences_between_Indian_Accounting_Standards_IAS_11_and_AS_7\"><\/span><strong>Differences between Indian <a href=\"https:\/\/www.legalraasta.com\/blog\/accounting-standards\/\">Accounting Standards<\/a> (IAS) 11 and AS 7<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<table width=\"602\">\n<tbody>\n<tr>\n<td><strong>According to Ind (IAS) 11,<\/strong><\/td>\n<td><strong>AS 7 specifies<\/strong><\/td>\n<\/tr>\n<tr>\n<td>There is no specific mention of borrowing expenses<\/td>\n<td>In AS 7 borrowing charges are specifically included in expenses.<\/td>\n<\/tr>\n<tr>\n<td>Contract revenue must be calculated at the fair market value of the consideration received\/receivable.<\/td>\n<td>Contract revenue must be recognized at the fair market value of the consideration received\/receivable in AS 7<\/td>\n<\/tr>\n<tr>\n<td>Deals with Service Concession Arrangements, which are agreements between a public and private entity to build, operate, and transfer infrastructure projects.<\/td>\n<td>Service Concession Arrangements are not covered under AS 7<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<blockquote><p><strong>Also Read,<\/strong><\/p>\n<p><a href=\"https:\/\/www.legalraasta.com\/blog\/accounting-methods\/\">Accounting Methods<\/a><\/p>\n<p><a href=\"https:\/\/www.legalraasta.com\/blog\/changes-in-indian-accounting-standard-for-nbfcs\/\">Changes in Indian Accounting Standard for NBFCs<\/a><\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"<p>AS 7 Construction Contract defines and specifies the accounting treatment of revenue and expenditures associated with a construction contract. Construction contracts have to be accounted for in the financial statements of the contractors using Accounting Standard 7 Construction Contract. Different Types Of Contracts A construction contract is one that is entered into expressly for the building [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":24388,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[2],"tags":[2056,2057,4607,4606,4605],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v21.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>AS 7 - Construction Contracts | Different Types Of Contracts<\/title>\n<meta name=\"description\" content=\"AS 7 Construction Contract specifies the accounting treatment of revenue and expenditures associated with a construction contract.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalraasta.com\/blog\/as-7\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"AS 7 - 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