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Hi, I am looking to elaborate on one of the questions from revision kit:
Co entered into a contract expected to last 24 months on 01.01.20X4. Fixed price of contract is $5M. At 30.09.20X4 costs incurred on the contract were $1.6M and estimated remaining costs are $2.4M. On 20.09.20X4 Co received from the customer a payment of $1.74M which is equal to total of amounts invoiced. Co calculates completion based on the percentage of the project certified as completed. At 30.09.20X4, the % certified as completed to date was 38%.
What amount should be reported @ 30.09.20X4 as Contract Asset?
Estimated profit: 5 – 1.6 – 2.4 = 1M
Profit to date: 1 * 38% = 0.38M
Contract Asset:
Costs to date 1.6M
plus Profit to date 0.38M
less Receivables 1.74M
equals 0.24M / 240,000 Contract Asset to be presented @ 30.09.20X4Is the above calculation correct?
The answer in the book is 160,000.
Which I completely agree with, since Contract Asset is pretty much an Unbilled Revenue, i.e. 38% of total costs gives us costs to be recognised of 1.52M plus 38% of 1M profit less AR; OR simply Revenue of 38% * 5M = 1.9M less AR of 1.74M gives us same answer 160,000.
Looking through other questions on forum here, it says it’s current way in standard to arrive at Contract Asset. But the book from BPP and revision kit uses both!
In one question using the the 1st method I nail the answer, but not with the other.
And my Study text and revision kit are the freshest valid for June session.
This is really frustrating as my initial understanding from work was also the second approach described above and I had to get used to the one taught for the exam.
Now, I am really confused as to what to expect on the exam, because it can cost some easy points (given it’s mutiple choice or number entry).
Is there a way to confirm with someone from ACCA what students should expect on the exam?
P.S. Just to dig deeper into this out of curiosity and scratch an itch in my brain I had with it for a month now :)… isn’t the first approach more often than not will actually give us incorrect number for Contract Asset and the books will not be in balance? Given different answers that would make sense to me, but I cannot wrap my head around it.
Hi,
You can use either approach to calculate the contract asset and there has not been an official approach given as to which one to use by the ACCA. I’m sure that in due course we will hear something that confirms what we are to do exactly.
Thanks
Hi,
I have reached out to ACCA and they confirmed that the marks will be given for both during the learning providers’ and stundents’ transition to correct approach. Hope this will be helpful for some other unsettled minds as me.
Email response:
“While learning providers and students transition between the IAS 11 Construction Contracts approach to calculate contract assets and the correct approach applying IFRS 15 Revenue from Contracts with Customers, ACCA will award credit for either approach. The importance of showing your workings in the Section C (Constructed Response questions) cannot be over-emphasised as the marker will be able to award credit for application of either approach.”
Hi, thank you very much… I am also crazy about this… this is very helpful.
I just post few minutes ago also on how to calculate the profit for obligation satisfied overtime:
Few questions calculate the profit as direct method (percentage of revenue – cost to date/inccured in period), while many others calculate as proportion (percentage of revenue – percentage of (cost to date + estimate cost to completion).I am so confused. 🙁
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