Easy, short and simple presentation on AS 7 and the fundamental to accounts, AS 9.

1. GOOD AFTERNOON
EVERYONE

2. ACCOUNTING STANDADS
7 AND 9
Issued by the ICAI

3. AS-7
CONSTRUCTION
CONTRACTS

4. WHY AS-7
Construction is a lengthy process, and
spreads over multiple accounting years.
Creates a problem in recognizing the
revenue and cost of the current
accounting period

5. PARA 2.1
“A construction contract is a contract specifically
negotiated 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.”
What is a Construction Contract?

6. Contracts for rendering of services E.g., architect or engineer
Commenced and completed within the same accounting year
Construction
contracts
under AS -7
Contracts for destruction or restoration of assets and the
restoration of the environment following the demolition of assets

7. Combining and Segmenting Construction Contracts
Segmenting
Construction Contracts
when
Separate proposals have been
submitted
Costs and revenues separately
identifiable
Separate negotiation for each
asset
contractor or contractee able to
accept or reject part of the
contract

8. Why Segmenting of construction contracts?
Contract A Contract B
Total Revenue –Rs 2,00,000
Cost Incurred - Rs 40,000
Total Cost (estd.) - Rs 1,00,000
Cost Incurred – 40%
Total Revenue –Rs 3,00,000
Cost Incurred - Rs 1,20,000
Total Cost (estd.) - Rs 2,00,000
Cost Incurred – 60%
Revenue to be recognised
Rs 2,00,000*40% = Rs 80,000
Revenue to be recognised
Rs 3,00,000*60%=Rs 1,80,000
Total revenue recognised = Rs 2,40,000

9. Contract A & B combined
Total Revenue – Rs 5,00,000
Total Cost Incurred - Rs 1,60,000
Total Estimated Cost - Rs 3,00,000
Cost Incurred – 53.33%
Revenue to be recognised
Rs 5,00,000*53.33% = Rs 2,66,650
Difference (revenue higher by) = Rs 26,650

10. ADDITIONAL ASSET
Significant Change in design
Change in technology/ Functioning
of the asset
Price negotiated irrespective of
original contract price
Treat separately, if:-

12. REVENUE
• Price contracted
+ / -
Variations in contract
• Claims
• Incentives payment
(measurable & probable)
COST
• Directly related to
contract
• Proportionate cost
recognized to
proportionate contract
activity
• Reimbursable by
customer

13. When Outcome can be estimated
• Para 21: “……contract revenue and contract costs
associated with the construction contract should be
recognized as revenue and expenses respectively by
reference to the stage of completion of the contract
activity at the reporting date. An expected loss should
be recognized as an expense immediately in
accordance with para 35”.
When Outcome cannot be estimated
• As per para 31, contract costs should be recognised as
an expense in the period in which they incur and
contract revenue to the extent of costs recoverable
Percentage
Completion
Method

14. Survey Method
Proportion of cost incurred to total
cost
Completion of a physical proportion
of the contract work
Any other suitable method
Calculation of degree
of completion

15. General
Revenue
recognised
Method of
recognition
Method for
degree of
completion
For contracts in
progress
Costs and
profits
recognised
Creditors
Debtors
Revenue
recognised, not
billed
Gross
Debtors
Amount billed
not recognised
as revenue
Gross
Creditors

16. AS-9
REVENUE
RECOGNITION

17. Revenue
includes
•Sale of goods
•Rendering of services, and
•Interest, royalties and dividend income
in the ordinary course of business.

18. Revenue does not include
Revenue from construction
activities
AS 7
Lease income and income
from HP
AS 19
Incomes of insurance
companies arising under
insurance contracts
Income from government
grants
AS 14
Inter divisional transfers

19. Conditions for recognition of revenue
Sale of goods
Rendering of
services
Interest,
royalties and
dividend income
Specific conditions
Measurable
Collection is
probable

20. Sale of Goods
Revenue recognised only when:-
1. Property in goods is transferred
2. Transfer against consideration
3. Significant risks and rewards of ownership are also transferred

21. Revenue by rendering of Services
completed service contract
method
Service under contract is complete:-
1. Fully or
2. Substantially
Proportionate completion method
For service involving execution of
more than one act
Recognize 100% of the
amount as revenue
Recognize
proportionately,
preferably SLM

22. Interest
• Charges for
the use of
cash
resources
Royalty
• Income
from
lending of
intangible
assets
Dividend
• Reward
from
holding of
investments
in shares

23. Interest
Royalty
Dividend
Determined by the
amount outstanding and
rate applicable
Basis the terms of the
relevant agreement
When right to receive
payment is established

24. AS 7 by
ICAI
AS by
NACAS
AS 9
by
ICAI
ASI 14
by
ICAI
AS by
NACAS