IPSAS 11 is based on IAS 11 Construction Contracts (Revised 1993).
IPSAS 11 prescribes the accounting treatment for Construction Contracts. This standard provides requirements on the allocation of revenue and costs to accounting periods in which construction work is performed. Contract revenues and costs are recognized by reference to the stage of completion of contract activity where the outcome of the construction contract can be estimated reliably, otherwise revenue is recognised only to the extent of recoverable contract costs incurred.
IPSAS 11 was issued in July 2001 and applies to annual periods beginning on or after 1 July 2002.
History of IPSAS 11
Annual periods beginning on or after 1 July 2002.
Refer to IFAC website here
Summary of IPSAS 11 Construction Contracts
IPSAS 11 prescribes the accounting treatment for Construction Contracts in the Financial Statements of the Contractor. The standard provides guidance for determining which contracts are to be classified as construction contracts and on the types of construction contracts in the public sector.
The standard provides guidance on the recognition of contract expenses and, if relevant, contract revenues and the disclosure thereof.
This standard should be applied by contractors that prepare and present financial statement under the accrual basis of accounting [IPSAS 11.1]. IPSAS 11 applies to all public sector entities other than GBEs [IPSAS 11.2].
Construction contract: a contract or a similar binding arrangement, specifically for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology, and function or their ultimate purpose or use [IPSAS 11.4].
Contractor: an entity that performs construction work as specified in a construction contract [IPSAS 11.4]
Cost plus or cost-based contract: construction contract in which the contractor is reimbursed for allowable or otherwise defined costs and, in the case of a commercially based contract, an additional percentage of these costs or a fixed fee, if any [IPSAS 11.4]
Fixed price contract: a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which may be subject to cost escalation clauses [IPSAS 11.4]
When a construction contract covers two or more assets, the construction of each asset should be treated separately if [IPSAS 11.13]:
1. (a) separate proposals were submitted for each asset
2. (b) portions of the contract relating to each asset were negotiated separately
3. (c) costs and revenues of each asset can be identified
A group of contracts should be accounted for as a single contract when [IPSAS 11.14]:
4. (a) they were negotiated together
5. (b) the work is interrelated
6. (c) the contracts are performed concurrently or in a continuous sequence
In case a contract gives the customer an option to order additional assets, construction of each additional asset should be accounted for as a separate contract if [IPSAS 11.15]:
7. (a) the additional asset differs significantly from the original asset(s) or
8. (b) the price of the additional asset is separately negotiated.
Determination of contract revenue and contract costs
Contract revenue includes [IPSAS 11.16]:
• the amount agreed in the contract initially
• contract work variations, claims and incentive payments
Contract work variations, claims and incentive payments are only included to the extent that (i) they are expected to generate revenue and (b) that they can be measured reliably [IPSAS 11.16].
Contract costs concern costs [IPSAS 11.23]:
• Directly relating to the specific contract
• Costs that are attributable to the general activity of the contractor's to the extent that they can be systematically and rationally allocated to the contract
• other costs that can be specifically charged to the customer under the terms of the contract.
Accounting treatment prescribed by IPSAS 11
1) The outcome of the contract can be estimated reliably
Application of the percentage of completion method: In case the outcome of a construction contract can be estimated reliably, revenue and costs related to the contract should be recognized in proportion to the stage of completion of contract at the reporting date [IPSAS 11.30].
An entity can estimate the outcome of a contract reliably, when it is able to make a reliable estimate of total contract revenue, the stage of completion, and the costs to complete the contract [IPSAS 11.31-32].
The stage of completion of a contract can be determined in different ways, including the following methods [IPSAS 11.38]:
(i) the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs
(ii) surveys of work performed
(iii) completion of a physical proportion of the contract work.
2) The outcome of the contract cannot be estimated reliably
In case the outcome cannot be estimated reliably, contract revenue should only be recognized to the extent that contract costs incurred are expected to be recoverable and contract costs should be expensed as incurred [IPSAS 11.40].
Expected deficits on construction contracts should be recognized immediately as an expense as soon as such deficit is probable, but only when it is intended at inception that the contract costs are to be fully recovered [IPSAS 11.44]. In case of a non-commercial contract where the contract costs will not be fully recovered from the parties to the contract, when the deficit will be compensated by a government appropriation, general purpose grant or allocation of government funds to the contractor, the requirement of the recognition of the deficit does not apply [IPSAS 11.46].
Following disclosures are required:
• amount of contract revenue recognized [IPSAS 11.50(a)]
• method used to determine contract revenue [IPSAS 11.50(b)]
• method used to determine stage of completion of the contract [IPSAS 11.50(c)]
For contracts in progress at the reporting date [IPSAS 11.51]
• aggregate costs incurred and recognized surpluses (less recognized deficits)
• amount of advances received
• amount of retentions
The entity has to present amounts relating to contract work [IPSAS 5.53]:
As an asset: the gross amount due from customers for contract work
As a liability: the gross amount due to customers for contract work
Issuance of IPSAS 11: Construction Contracts
1 July 2002
Effective date of IPSAS 11