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PP&E and their depreciation in construction contracts IFRS 15 Revenue

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › PP&E and their depreciation in construction contracts IFRS 15 Revenue

  • This topic has 5 replies, 2 voices, and was last updated 4 years ago by P2-D2.
Viewing 6 posts - 1 through 6 (of 6 total)
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  • July 17, 2020 at 12:53 pm #577083
    ahmadimam120
    Participant
    • Topics: 21
    • Replies: 18
    • ☆

    Hi, I had a confusion related to 2 questions which are conflicting with my concepts. 1) There is a question in kaplan book ch#11 test your understanding # 6. This question was related to construction contracts. In this question a guy called Amir on 1 January 20X1 contracted with a customer to construct a stadium. The contract expected to take 2 years to complete. In the question it also tells that on 1 January 20X1 (i.e,exactly at the inception of contract) Amir purchased a plant to be used on contract at a cost of $16m. The question only asked for accounting of first year (i.e, 1 january 20X1 to 31 December 20X1). Now in a solution provided to this question the cost of purchasing a plant i.e, $16m was added in the total contract cost and then calculated the overall profit. And secondly, the depreciation of 1 year from 1 January 20X1 to 31 December 20X1 was included in ‘costs incurred to date’ in calculating the inventory figure in SOFP i.e, cost incurred to date(which included depreciation) minus cost of sales recognized to date= inventory. Note that this depreciation was not included in total contract cost in calculating the overall profit or loss.

    2) Second question is TYU#8 (Merryview).In this question we have to calculate contract asset for 2 years , for the year ended 31 March 20X1 and for the year ended 31 March 20X2. Scheduled date of completion for the contract was 31 December 20X2. The contract commenced on 1 July 20X0. Now Firstly, This question required us to calculate cost incurred to date and estimated costs of completion by ourselves which will finally give us the total contract cost i.e,(estimated costs+cost incurred to date=total contract cost). Secondly, unlike to scenario 1 above where amir had purchased the new machinery for construction at the start of contract , this question tells us that, ”Plant and machinery used exclusively on the contract cost $3,600,000 (or 3600 if we round off last 3 zeros) on 1 July 20X0 i.e, at the start of contract”.At the end of contract plant and machinery will be expected to transfer to a different contract at a value of $600,000, so this will become residual value for calculating depreciation and depreciation will be calculated on time-apportioned basis. Now my question is that unlike previous scenario , in this scenario’s solution the depreciation was added to cost incurred to date and estimated costs to completion which gave us the total contract cost or in other words depreciation was added to total contract cost WHY?? Is it because in previous scenario amir purchased new machinery for the contract so the total cost of buying machinery was added to the total contract cost and depreciation was only included in cost incurred to date figure which we use to calculate inventory in SOFP. In 2nd question only the depreciation was added to cost incurred to date and estimated costs to completion in total contract cost and not the total cost of plant?? Kindly explain this issue

    July 23, 2020 at 8:26 pm #577785
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    In the first scenario the deduction of the $16m will include the total depreciation of the asset and so no adjustment for depreciation is required.

    In the second scenario as the asset is already in use we cannot just deduct the total costs and so we need to calculate the depreciation on the asset for that period, which is then deducted as a contract cost.

    Hope that clears it up for you. Let me know if you’re still confused.

    Thanks

    July 25, 2020 at 11:33 am #577961
    ahmadimam120
    Participant
    • Topics: 21
    • Replies: 18
    • ☆

    I am still confused on your explanation about the first scenario. Its still not cleared in my mind.So kindly explain the reason behind your explanation about first scenario in more cleared way so that i can understand it more comprehensively.As far as your explanation about second scenario is concerned , what i was able to understand from your response is that, if the plant and machinery has not been bought new for the construction project but has been used on it then the ”costs incurred to date” and ”estimated costs of completion” will include only depreciation in it i.e, we then need to add depreciation of plant in ”costs incurred to date” and ”estimated costs of completion” by ourselves (kindly correct me if I am wrong about my understanding of the second scenario)…..

    July 27, 2020 at 8:03 pm #578326
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    So, what exactly isn’t clear in the first scenario? Let me know and I’ll elaborate.

    Thanks

    August 5, 2020 at 9:14 am #579304
    ahmadimam120
    Participant
    • Topics: 21
    • Replies: 18
    • ☆

    So can i understand it as that whenever you will buy a new machinery for construction contracts the total cost of buying the machinery will be included in calculating the total profit or loss on the contract and the depreciation will only be charged to ”cost incurred to date ” in SOFP in calculating the inventory figure i.e, ”(cost incurred to date+depreciation) – COS recognized to date=inventory. Is that right?

    August 8, 2020 at 8:26 am #579612
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Yes, if you purchase PPE when calculating the total contract profit you include the depreciation as part of the total costs. Once you have the total profit, you will then recognise the amounts based upon the completeness of the contract within profit or loss.

    Thanks

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