Thursday, March 2, 2017

IAS 11 –Construction Contracts


“Quality is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skillful execution; it represents the wise choice of many alternatives.”
William Foster



Hello!

It’s another edition on IFRS is easy.

Are you a Lagosian? If you are a Lagosian, you might have sometimes secretly wished that people had no private cars cos the traffic jam in Lagos is 'crazy'. 

The incessant traffic issues encountered by inhabitants of the Economic City of Nigeria, Lagos, led to the need for the construction of the Third Mainland Bridge in the year 1975. This bridge which was the longest in Africa at that time, connects Lagos Island to the Mainland. It was built by Julius Berger Nigeria Plc. and opened by President Ibrahim Babangida in the year 1990. It is believed that the construction cost not less than a whooping sum of one hundred and twenty two million pounds (sterling) then. The construction took over a year before completion. Recently, the Fourth Mainland Bridge is already budding.

It is obvious from the above that it is quite impossible for the construction of some particular contracts to last less than a year. Some contracts can go as long as six to ten years before completion. How then should the contractor recognize profit? 

Should contractors wait till the end of completion (regardless of the number of years it will take)? Some have argued that the better approach is for the contractor to wait till the end of the contract before recognizing profit as this will prevent the use of forecasts and estimates engaged by the IAS 11 approach. 

Notwithstanding, this approach will be absurd as costs incurred during the early years of the contract would be recognized but with no corresponding revenue. This would lead to several years of losses, then one year of extremely high profit.

IAS 11 proffers an awesome dissection to the issues in Construction Contracts and their treatment in the financial statements. For a complete dosage, detailed examples and better clarification on the subject matter of IAS 11 – Construction Contracts, click below to view or download the pdf. Note: You will be amazed by the detail in each expatiation.

                                    IAS11 Construction Contracts pdf
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