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Ias 11 Case Study

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1. Overview
The main objective of standard (IAS 11) is to set the adjustment of income and cost with respect to accounting periods when construction activity is done and are related to contruction contract. This standards to be applied in the financial statements of contractors. It is a contract made and negotiated for contructing an assets. IAS 11 was reissued in December 1993 and is applicable for periods beginning on or after 1 January 1995.
2.History of IAS 11
The history of contruction Contracts starts from December 1977. Accounting for Construction Contracts followed by IAS 11- Introduction of Accounting for Construction Contracts in March 1979.On,1 January 1980, Effective date came into practice (IAS 11).In May 1992,Exposure Draft …show more content…

The proposed treatment of a construction contract by IAS 11 balances the requirement to present financial statements under Accruals Basis, and the conventional wisdom of the Prudence Concept. Where a net inflow of economic benefits under a construction contract is probable, costs and revenue are recognized to the extent of completion of the contract (i.e. Accruals Basis). If however a loss is expected under the contract, the entire loss is immediately recognized (i.e. Prudence …show more content…

Outcome of a cost plus contract can be reliably measured .The inflow of economic benefits is probable.
6.Features of Construction Contracts
Construction contracts may also include the following features:
6.1 Cost Escalation Clauses: Contractors may be entitled to claim unanticipated increase in construction costs above a certain level defined in the cost escalation clause. This is usually included in fixed price contracts to protect against the risk of abnormal rise in prices which may render the performance of contract unfeasible for the contractor.
6.2 Incentive Payments: Contractors may be entitled to receive additional payments from clients upon fulfillment of a predefined criteria such as completion of project within a certain time frame.
6.3 Penalties & Claims: Contractors may be liable to reimburse clients for not performing according to the specifications of the contract. Reasonable estimate of losses that may be suffered due to non performance of a specific term of the contract may be defined in the penalty clause (e.g. amount payable for every day exceeding the project

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