Anudeep Sai Yeluri PGP/SS/11-13/PG-B

Accounting is a process of 1) Identifying 2) Measuring 3) Communicating economic information

The primary object of an Accounting Standard is to standardize the diverse accounting policies and practices.

Enterprises whose equity or debt securities are listed on a recognized stock exchange in India. Enterprises whose securities are in the process of being issued and will be listed on a recognized stock exchange. For all enterprises whose turnover for the accounting year is more than Rs. 50 crore.

Construction contract: it is a contract specifically negotiated for the construction of an asset or combination of assets that are closely interrelated interdependent in terms of their design technology and function of their ultimate purpose or use.

Fixed Price Contract: it is a construction contract in which the contractor agrees to a fixed contract price or fixed rate per unit of output, which in some cases is subject to cost escalation.

Cost Plus Contract: is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus percentage of these costs or a fixed rate.

To prescribe the accounting treatment of revenue and costs associated with construction contracts because the date at which the contract activity is entered into. The activity gets completed in different accounting periods. Therefore the primary issue is the allocation of contract revenue and contract costs to the accounting periods in which the construction work is performed.

If the contract covers number of assets, construction of each asset will be treated as a separate construction contract when : Separate proposals have been made. Each asset has been subject to separate negotiation and the contractor and the customer has been able to accept or reject the part of the contract. The costs and revenues of each asset can be identified.

A group of contracts whether with a single customer or with several customers, should be treated as a single construction contract when: The group of contract is negotiated as a single package. Contracts are closely interrelated that they are, in effect, part of a single project with an overall profit margin and The contracts are performed concurrently or in a continuous sequence.

Contract revenue comprises of initial amount agreed. Variations in the contract work, claims and incentive payments to the extent it is probable that they will result in revenue and can be measured.

Contract costs comprises of Direct costs Attributable costs Specifically chargeable costs as per the terms of the contract.

It did not have percentage of completion method. So the revenues and expenses could only have been calculated at the completion of the work.

As we all know the drawback of this accounting standard, this AS-7 has been restructured and hence forth we started following the same. AS-7 considers all the construction contract and also lays down norms on how to calculate revenue and expenses.