This document provides information about a 3-year construction contract Company ABC obtained in 2007 to build 2 boilers for 90,606. It gives initial cost estimates and details actual costs incurred each year, along with progress billings and a request to calculate revenue and expense recognition under IAS 11 for years 2007-2009 based on percentage of completion.

1. 1
SOLVAY BRUSSELS SCHOOL OF ECONOMICS & MANAGEMENT
ADVANCED ACCOUNTING COURSE - ACADEMIC YEAR 2013-2014
CASE STUDY n°1 – A - REVENUE RECOGNITION
IAS 11 – Construction Contracts – Company ABC
As at January 1st, 2007, Company ABC obtained a fixed price contract for 90.606 to build 2 boilers. The initial amount of revenue agreed in the contract is 90.606.
Company ABC’s initial estimate of total costs amounts to 70.532, which can be summarized as follows:
- Material and subcontracting: 58.767;
- Labour: 4.533;
- External success agent fees: 2.809;
- Internal commercial costs: 130;
- Standard contingencies: 2.481;
- Warranty costs (as per Company ABC’s rule): 1.812.
It will take 3 years to build the 2 boilers.
By the end of year 1, Company ABC's estimate of costs has changed as follows:
- Material and subcontracting increased by 300;
- Labour increased by 93.
Costs incurred at the end of year 1 can be summarized as follows:
- Material and subcontracting: 5.928;
- Labour: 979;
- External success agent fees: 1.404;
- Internal commercial costs: 130.
By the end of year 1, part of the initial provision for standard contingencies (1,981) is considered as not meeting IAS 37 conditions. The remaining balance (500) does actually correspond to a tax risk and does actually meet the IAS 37 recognition criteria. At the end of year 1, boilers are still in a fabrication process.
In year 2, the customer approves a variation resulting in an increase in contract revenue of 200, which corresponds to estimated additional contract costs for Company ABC of 150. The warranty provision is not updated to the extent that this contract revenue’s variation is not significant. At the end of year 2, costs invoiced include 100 for standard materials stored at the site to be used in year 3 to complete the project.
In year 3, an amount of 250 has finally to be paid to the tax administration.
Company ABC determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed to date bear to the latest estimated total contract costs.

2. 2
Below the detail of contract costs incurred during years 2008 and 2009 (excl tax risk) :
2008
2009
Material and subcontracting
30,143
23,096
Labour
2,988
709
External success agent fees
1,405
0
Total
34,536
23,805
2007
2008
2009
2010
Progress billings in each year
8.500
45.500
28.900
7.906
Required:
Please calculate:
- Total contract costs and estimated gross margin of the contract at the end of each year;
- The stage of completion of the contract at the end of each year and the amounts of revenue, expenses and profits to be recognised in financial statements;
Please show the relevant amounts to be disclosed in financial statements of the contractor for years 2007, 2008 and 2009.
The template for the solution is presented below.
2007
2008
2009
Initial amount of revenue agreed in contract
Variation
Total contract revenue
Contract costs incurred to date
Contract costs to complete
Total estimated contract costs (excl. provisions)
Provision for tax risk
Warranty provision
Total estimated contract costs (incl. provisions)
Estimated profit
Stage of completion

3. 3
Budget at beginning of year 2007:
Budgeted contract revenue:
Budgeted contract costs:
Budgeted gross margin:
Forecast at the end of year 2007:
Budgeted contract revenue:
Budgeted contract costs:
Budgeted gross margin:
Forecast at the end of year 2008:
Budgeted contract revenue:
Budgeted contract costs:
Budgeted gross margin:
Forecast at the end of year 2009:
Budgeted contract revenue:
Budgeted contract costs:
Budgeted gross margin:
Year 2007:
Costs incurred:
Cos ts Invoiced
Down
payments
current year
Down
payments
previous year
Invoices to
receive
Invoices related
to previous year Incurred
Material and subcontracting
Labour
External agent fees
Warranty cos ts
Total :
Total estimated costs to determine the POC (Percentage Of Completion) :
POC :
Gross margin to be recognised:

4. 4
Year 2008:
Costs incurred during the year:
Cos ts Invoiced
Down
payments
current year
Down
payments
previous year
Invoices to
receive
Invoices related
to prev years Incurred
Material and subcontracting
Labour
External agent fees
Warranty cos ts
Total :
Total estimated costs to determine the POC :
Cumulative POC :
Cumulative gross margin to be recognised:
Gross margin of the year:
Year 2009:
Costs incurred during the year:
Cos ts Invoiced
Down
payments
current year
Down
payments
previous year
Invoices to
receive
Invoices related
to prev years Incurred
Material and subcontracting
Labour
External agent fees
Tax ri sk
Warranty cos ts
Total :
Total estimated costs to determine the POC :
Cumulative POC :
Cumulative gross margin to be recognised:
Gross margin of the year :

5. 5
The amounts of revenue, expenses and profit recognised in the income statement in the three years are as follows:
To Date
Recognised in prior years
Recognised in current year
Year 1
Revenue
Contract costs
Warranty provision
Cost of sales
Selling expenses
Profit
Year 2
Revenue
Contract costs
Warranty provision
Cost of sales
Selling expenses
Profit
Year 3
Revenue
Contract costs
Warranty provision
Cost of sales
Selling expenses
Profit