Revenue Recognition Of Construction Industry Essay

1817 words - 7 pages

Revenue recognition for construction industry is a complex area, now IASB and FASB are trying to work out a comprehensive new accounting standard for revenue recognition. Before they issue the new standard, which is best interest for our client to know current standard and development issues for revenue recognition. This article will introduce how the revenue recognised at present within the construction industry at first. Second the process of new standard development will be discussed. In third part of this article will demonstrate reason why it is difficult and time consuming to developing the new standard. In the end, it will consider the lasted exposure draft published by IFRS and past reversions to make a future perspective about some benefits new standard will bring to construction contract.

Current revenue recognition within construction industry
If the construction contract result can be estimated reliably, then at the end of each reporting period revenue related should be recognised according to completion level of the contract and if the outcome cannot be judge reliably, which revenue would be recognised only cover the contract cost(IFRS, 2012). The definition of 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’ (IFRS, IAS11 construction contract, 2012).
IAS 18 is the tandard for revenue recognition, which involved the contract of service (Mckeith and Collins, 2013). But it is difficult apply in certain industries like construction. Because the construction contract will take many years to be finished such as build assets (Elliott and Elliott, 2013). “The scope of IAS 2 also excludes working in process arising under construction contract”. If IAS 2 applied in construct contract, which means all the revenue will be recognised at the end of the contract and it may cause no profit in the financial report for years and suddenly a large number of revenue be recognised in the final year (Melville, 2011:167). So it is so necessary to introduce IAS 11for construction industry.
There are two circumstances, one is the outcome of contract can be reliable measured. That is to say the company should reliable measure the total contract revenue and the probable future cash flow of the economic benefit, the cost incurred and stage of complication (Mckeith and Collins, 2013). But IFRS does not issue how to measure the proportion of completion. So normally they will determined by three ways. First is determined by the cost incurred during that period compare with the total cost of the contract. Second is doing a survey about how the working has done by the date. Third is physical percentage complete of the whole work (Melville, 2011) .Another circumstance is that the outcome of the contract cannot be reliable estimate, ‘IAS 11 does not...

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