Amount Invoiced + Calculation of True Profits in Construction Industry (IAS-11)

Mobilization Advance is the advance payment made by the client to the contractor to mobilize (start) the project. Usually this is 20% of the project value and is paid upfront to mobilize the contractor to start the project. This is then deducted from each submitted IPC (Interim Payment Certificate). Deduction rate varies from 5% to 20%. Essentially this is an interest free source of finance provided by the client. and therefore recorded as Dr Bank Cr Mobilization Advance. In a nut shell, it is opposite of the Retention Money.
Thanks
Muhammad Waqas ACCA

Topic # 1 (Mobilization)
No sir may be in uk there is a concept of Re Mobilization.. if yes please explain this for our knowledge.

but in Pakistan, Mobilization Payment is the advance payment by the client to the contractor to mobilize him to start the project with these funds.However, its is a kind of interest free source of finance / loan for the contractor by the client and this subsequently deducted from each subsequent IPC.

Let say project value is PKR 4000 Million, then Mobilization advance would be PKR 800 Million (4000 X 20%) paid upfront.
at this stage we make the following journal entry;
Dr Bank 800 Million
Cr Mobilization Advance (Liability) 800 Million

Now this mobilization advance would be deducted on each subsequent IPC. and the %age of deduction varies from 5 % – 20% . let say this is 10% agreed in this project.

Now say after 2.5 month we submit the first IPC valued 100 Million.Now we make the following journal entry;
Dr Receivable 100 Million
Cr Revenue 100 Million

On receipt of this amount; 10% of this value shall be deducted as mobilization advance reduction,10% retention money, 6% Income Tax etc.
and now we make the following entry to record this transaction;

Dr Bank 74 Million
Dr Mobilization Advance 10 Million
Dr Income Tax 6 Million
Dr Retention Money 10 Million
Cr Receivable 100 Million

i-e Mobilization advance is a kind of loan (interest free loan) to the contractor by the client amortized over the project life with the total IPCs of the project over its life.

Let say (to keep it simple) our project submits same IPC each time (it always submits work done valued 100 Million), this 10% deduction would take mobilization advance repaid in 40 IPCs. and the end of the project, mobilization advance would be Nill.

This was just to share with you my honourable sir and i would be pleased if you explain the Re Mobilization concept as you mentioned in your above reply and let grasp on construction accounting with your honourable support.

Topic # 2 (Revenue)
Dear Sir, the practice being followed for revenue recognition in my company is as;

When an IPC is submitted, then the journal entry made is
Dr Progress Billing
Cr Fund Transfer (Relevant Project)

similary all expenses (Cement, diesel, steel, water stopper etc) incurred on a project are recorded as
1st entry
Dr Expenses A/C
Cr Bank / Payable

2nd entry
Dr Fund Transfer (Relevant Project)
Cr Expenses A/C

now the balance on Fund Transfer Ledger is the transferred to profit A/C.

Dear sir, i know this wrong treatment and our Accounts manager is ACMA Inter and working with organization since last 34 years and thinks he accounting treatment is correct. I am working in its finance department (Fund Management Portion) since a year and i observe such kind of surprises here.then i had an account with opentuition when i was a student , consulted your lecture notes, then vedio lectures, then consulted you for practicalilites. Your kind support means a lot for me sir.
Once against Thanks
Looking for your Answer
Muhammad Waqas ACCA

Lolx ….Sir i am also clear about this and no objection with the fund transfer ledger.
As such, i am looking at 9 local and 4 international projects. As i am in Fund Management section, therefore i do maintain the Fund Transferred to sites and call for Fund Allocation via Fund Transfer ledger.The only issue i had was the that the matching concept of revenue recognition & expenses was not being followed and hence on profit & loss analysis over 4 year project (to track project performance), we observed the amazing surprises like 11% profit in T1, 47% loss in T2, 26% profit in T3, and 4% profit in T4. Just now after receiving your reply, i went straight away to the manager accounts and he said no no %ages but we transfer all of the Cement, Diesel, Steel etc to the Fund Transfer ledger i-e transfer of actual expenses rather same %age as used for revenue recognition.Matching concept not being followed and as per your words this is wrong.

However, do note that in your first reply of this conversation, you said to use actual profitability of projects.

Actual profitability is as fluctuating as discussed above.

and Matching concept (IAS-11) by default can,t help us to measure the project performance as;

1. In its work certified method, it takes actual revenue but COS is the balancing figure of Revenue less profit i-e hence it ignores actual spending on a project.

2. In its Cost Basis method, it takes actual COS (actual spending on a project) but ignores actual revenue (Approved IPCs) and takes revenue as a balancing figure of COS + Profit / (Loss).

Hence, by default IAS-11 deprives us to measure the true performance of a project over say 4 year period as Revenue and COS are two folds of the same thing. if one gets actual the second is a balancing figure & vice versa.

Dear respected, i have kept my head thinking as how to make a true profit & loss analysis of a project over a 4 year period ..??

Plus what treatment should i get followed in my company.

Thanks in advance.
Cordially,
Muhammad Waqas

Topic (Cost Recognition)

Lets have an example for what you want to say;

Year 1 Data:
Percentage completion 15%
Actaul Expenses (Spending) 500 Million
Total Estimated Project Cost 2800 Million
Cost to be recognized as per IAS 420 Million (15% of 2800 Million)

Now the Double Entry should be;
Dr Profit & Loss A/C 420 Million
Cr Expenses A/C 420 Million

Balance on Expenses A/C = 500 Million – 420 Million = 80 Million Dr

Year 2 Data:
Percentage completion 28%
Actaul Expenses (Spending) 1080 Million
Total Estimated Project Cost 2800 Million
Cost to be recognized as per IAS (Cummulative) 784 Million (28% of 2800 Million)

this year cost to be recognized = 784 Million – 420 Million = 364 Million

Now the Double Entry should be;
Dr Profit & Loss A/C 364 Million
Cr Expenses A/C 364 Million

Balance on Expenses A/C = 1080 Million – 420 Million – 364 Million = 296 Million Dr

Is that right you wana say ?? ok Fine.

Then it means their is no solution to measure how the project performs over years (comparative Profit & Loss Analysis) ?? Obviously, for this we need to incorporate the actual spendings not one calculated as per IAS.

As you can see above that in calculating first two years financials you ignored total of 296 Million expenses.

I think this is the same draw back in the IAS-11 as is IAS-19 where due to same expected return is taken for each project but Acturial losses could escape under the umbrella of corridor approach adopted for Acturial losses being OCI items.

Am i right ?? we have no fine solution for this ??

Yes sir i also mean the same. 296 Million of expenses are ignored now but shall be recognized ultimately i-e deferred now to be recognized later.

and yes the annual profitability is determined by comparing the figures you have calculated with respectively 15% and 13% of the contract value to give 15% of the overall anticipated profit in year 1 and, in the second year, 13% of the overall anticipated profit. this means that profit calculated on the basis of IAS are actually compared but you know very well that we cant, measure performance by having a comparison in this way. if the Project Managers and Consultants are driving unnecessary benefits from the company by both hands and plan that they resign before the completion of the project when actual project ROI is easy to calculate..they plan to drive the benefits by both hands and therefore we want to measure project performance by taking into consideration the actual spending on a project ..what should we do sir ????