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Question: The first issue concerns a major contract involving the development of an old riverside warehouse into a conference centre in Bridgetown. An architect working on the development has discovered that the property will need significant additional structural improvements, the extra cost of which is estimated to be $350,000. The contract was originally forecast to make a profit of $200,000. The development is currently about one third complete, and will take a further 15 months to finish, including this additional construction work. The customer has been told that the completion of the contract will
be delayed by around two months. However, the contract price is fixed, and so the additional costs must be covered by Bill Co.Here, the $150000 is said to be provided for in line with IAS 37.
Could you please help with this question? Its a matters to consider and risk of material misstatement question.
Is there any saying in Construction contract in IFRS 15 to recognised this in line with IAS 37. Also what does IFRS 15 say about loss arising from contracts, how do we recognise the loss incurred. I read IAS plus for IFRS 15 construction contracts, they did not mention the treat of a loss making contract.
For any AA student reading this post don’t panic – the referenced question is a P7 (now AAA) questions. (Rezwana – please make sure you post future Qs to the correct forum.)
Think about it – a business won’t be in business for long if it expects to make losses. IFRS 15 is about revenue recognition. For contracts with performance obligations that are satisfied over time (e.g. construction contracts), in simple terms, revenue is recognised – together with proportion of cost – so profit is recognised, over time.
What a loss-making (“onerous”) contract means is that the contractor/builder will incur costs that cannot be passed on to the customer – these costs are an obligation i.e. a liability – which means making a provision – this falls within the scope of IAS 37 (so doesn’t need to be dealt with in IFRS 15 also).
Really sorry for posting in the wrong place again and thank you for the great explanation!
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