MyCIMA

IAS11

Posted: Monday 08 March 2010 by Patrick O'Leary
Replies : 1

I have three questions on the recognition of costs and revenues under IAS11.

This standard, among other things, states that contract revenue can be matched with the contract costs incurred in reaching the stage of completion.

One of the contracts has a general cost in Cost of Sales. This covers the company's overall capital costs but these are not directly attributable to any specific item in the contract.  Therefore, should this be included under depreciation and secondly, should this cost be excluded from the recognition computation in IAS 11, because it is not directly attributable to that contract?

My final question is to do with termination charges.  The customer is obliged to pay a penalty charge for termimation, and this adequately covers off future lost profits if they were to terminate early.  However, is there a need to take into account of assets that need to be liquidated at the time of termination and could this limit the revenue that can be recognised?

 

 

Contract Costs

Posted by Nick Topazio on Monday 15 March 2010 09:44

In my experience general capital costs should not be included as directly attributable to the contract but rather recovered as part of an overhead recovery rate applicable to all contracts (for example total overhead including depreciation divided by total direct labour cost = overhead rate.  Overhead rate multiplied by direct labour cost incurred under the contract = overhead recovered against the contract.)

Regarding termination costs - you determine the expected contract profitability by forecasting costs that you expect to incur to satisfy the contract deliverables (assuming that the contract runs its course, unless you have evidence to the contrary).  Comparing the expected contract costs with expected contract revenue gives expected contract margin.  This is applied to costs incurred to date to give current margin and revenue.  If termination is not expected then there is no need to factor it in unless at the end of the normal term of the contract there are assets to write off, in which case these should be included in the total expected costs.

Hope that is clearer.