How do we recognise the revenue in Building Construction company.
Illustrate with good/understandable example.
Can anybody focus on it ?
Thanks in advance
HiRevenue to be recognized on the basis of percentage of completion POC basis. If you got contract to built builiding for a some one than POC method may suits you.Actual cost divided by Estimated cost and then multiply by estimated revenue to recognized the portion of revenue recognised or if engineer can identify the percentage of construction completed you can use than percentage to record revenue.
Construction contracts are covered with IAS11.
For prudence remember to recognise the loss at once as expense, when you start to expect
such loss after completion the construction.
I suggest you IAS 11 with two alternatives treatments:
– to recgnize revenue only after completion
– to recognize revenue based on percent of advancement (completitude ratio).
If first treatment is obvious, for the second one I give one example:
a construction in amount of 100,000 in cost with the total selling price 120,000
Let’s assume that in the end of an accounting period (month, year) the completion of the pr
oject is about 40% (that’s mean physical stage). The cost of the project may be 30,000, 40,000 or 50,000 depending of the project completion. That means to not mix physical completion with cost completion.
So, let’s assume that for 40% physical completion ratio we register 45,000
We capitalize 45,000 and we accrued (45,000 / 100,000) x 120,000 = 54,000
In this respect we will match better the cost with revenues for the first period and also for next period.
I recommend this second method – otherwise the company seems to work for nothing in the first period; to not create any value added, that means a nonsens.
Thanks for communication
Yes we have apply POC method
Any Quote fm IFRS / IAS
RegardsYes immediate loss should be booked on onerous contracts (loss contracts) that is When estimated cost is more than estimated revenue.