AFAR: A Fastrack of Long-Term Contracts

LONG-TERM CONTRACTS (A QuickNotes)

Quicknotes Topics

AFAR: A Fastrack of Partnership Formation and its Operation

AFAR: A Fastrack of Partnership Dissolution

AFAR: A Fastrack of Partnership Liquidation

AFAR: A  Fastrack of Corporate Liquidation

AFAR: A Fastrack of Instalment Sales

AFAR: A Fastrack of Consignment Sales

AFAR: A Fastrack of Franchise Accounting

AFAR: A Fastrack of Long-Term Contracts

FAR: A Fastrack of Inventories

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List of AFAR Books

A 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 ultimate use or purpose.

Types of Construction Contracts

1.       Fixed price Contract

·         Agreed to a fixed price

·         Subject to cost escalation clauses

2.       Cost Plus Contract

·         Reimbursed for allowed or otherwise defined costs plus a % of these costs or a fixed fee.

Construction Revenue- the total amount of consideration receivable under the contract.

Variation- instruction by the customers for a change in the scope of the work to be performed under the contract.

Incentive Payment- additional amounts paid to the contractor are specified to be met or exceeded.

Claims- an amount that the contractor seeks to collect from the customers or another party as reimbursement for costs not included in the contract price.

Construction Contracts

·         relate directly to the specific contract

·         Are attributable to contract activity in general and can be allocated to the contract.

·         Chargeable to the customers

The cost that are direct:

1.       Site labor costs

2.       Materials used

3.       Depreciation

4.       Moving PPE

5.       Hiring PPE

6.       Design and technical assistance

7.       Rectification and guarantee work

8.       Claims from third parties

A.      %-Completion Method

·         An application of the accrual assumption

·         Avoids the mismatch between costs being recognized as they are incurred and revenue only being recognized when the contracts are completed.

I.                    Input Measures

·         Based on an established or assumed relationship between a unit of input and productivity.

a.       Cost-to-cost method- degree of completion is determined by comparing costs already incurred with the most recent estimates of total costs expected to complete the project.

b.      Effort-expended Method- based on some measure of work performed.

II.                  Output measures- are measured in terms of results achieved. It was based on units produced.

Financial Statement Presentation

Current Assets. Gross Amount due from Customers- It comprises the total cost incurred on the contract + cumulative recognized profit less progress billings

Current Liability. Gross Amount due to Customers- Progress Billings less total Cost incurred in the contract + cumulative recognized profit

Cost-Recovery Method

1.       Recognize Revenue only to the extent of contract costs incurred in which are expected to be recoverable;

2.       Recognize contract costs as an expense in the period they are incurred.

Financial Statements Presentations

Current Assets- Total costs incurred on the contract, less progress billings

Current Liability- Progress Billings less total cost incurred on the contract

General Administrative Expense- change to income in the period when they occur.

Contract Retention- guarantee the completion of the contract in satisfying manner (Current Assets)

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