Accounting – FRS 11: Construction Contracts
The nature of construction contracts may make hard for you to prepare your accounts and the financial statements (If you need accounting service in Singapore, we are by your side if you need extra help). However, the FRS 11 prescribes the accounting treatment of costs and revenue associated with construction contracts. This standard utilizes criteria established in the Framework for the Preparation of Financial statements to determine how and when the costs and revenue in construction contracts should be reported.
A construction contract can cover several assets. According to FRS 11, the contract for each asset should be treated as an individual contract when:
A proposal for each asset contract was submitted separately
Each asset is a subject to separate negotiation and the customer, and the contractor has agreed to exclude the part of the contract that shows the relationship between the assets
The revenues and costs for each asset can be specified
On the other hand, a group of construction contracts, whether with several customers or single client shall be perceived as single contract when:
- The contractor and the client(s) negotiate the contracts as a single package
- The contracts are closely related
- The contracts are worked on concurrently
The FRS 11 also offers guidelines regarding the treatment of additional assets in construction contracts. It also offers conditions under which the construction of additional asset can be perceived as a separate construction contract. It is important to understand the standard to avoid traps when preparing accounts for this kind of business (Common Accounting Mistakes and How to fix them).
According to RFS 11, contract revenue comprises the initial amount agreed in the contract and the variations in contract work, incentive payments, and claims. In contracts, variation is a situation where your client requires a change in the scope of the contract. This can result in either increase or decrease in the contract revenue.
On the other hand, progress claim is the amount that you (contractor) seek to collect from your client as reimbursement for costs that are not included in the contract price. Always remember that you should measure the value of contract revenue in terms of the fair value of the consideration received.
Contract costs comprise of:
- All costs that directly relate to the contract in question
- Costs that can be attributed to the contract activity and are can be allocated to the specific contract
- Other costs that are specially chargeable to your client under the terms of the contract
We should not forget that construction contracts are businesses like any other, and therefore, you probably need an accounting service to get this task done to prepare their financial statements. The FRS 11 defines various categories of costs involved in contracts and offers a clear guide on the double entry accounting and how these costs and revenues should be recognized in financial statements. Therefore, all construction contracts in Singapore should adhere to the FRS 11 when it comes to financial reporting.