Construction contracts

Dear Sir,

I writing to inquire about the construction contracts as part of the F7 syllabus.

I was going through the BPP revision kit I had purchased earlier this year – version valid till June 2017- and found a question (MCQ type question 61) on construction contract that I didn’t understand.

Upon looking in the BPP study text – a version valid till June 2017- I couldn’t find anything on construction contracts in the entire book. Not even a mention in the index at the back.

That lead me to look into the detailed F7 syllabus on the ACCA website and it does’t mention construction contracts under the revenue heading. It does mention items such as ‘recognising revenue over a period of time and at a point in time etc. but nothing about construction contracts.’

I do understand that IAS 11 isn’t valid anymore but thought it was under IFRS 15.

Please see the question below and the solution provided in the Revision kit.

A company entered into a contract on January 1 20X5 to build a factory. The total contract revenue was $2.8 million. At 31 December 20X5 the contract was certified as 35% complete. Costs incurred during the year were $740,000 and costs to complete are estimated at $1.4 million. $700,000 has been billed to the customer but not yet paid.

What amount will be recognised as a contract assest or liability in respect of this contract in the statement of financial position as at 31 December 20X5?

A $271,000 contract asset
B $ 509,000 contract asset
C $271,000 contract liability
D $509,000 contract liability

Answer : A
Solution:

Costs incurred to date 740,000
Recognised profit (W) 231,000
Amounts invoiced (700,000)
Contract asset 271,000

Working
Total contract revenue 2,800,000
Costs to date (740,000)
Cost to complete (1,400,000)
Total expected profit 660,000

Profit to date (660,000 x 35%) = 231,000

Your clarification would be much appreciated.

Many thanks