CHAPTER 7_CONSTRUCTION CONTRACTS.pptx

(Advanced Financial Accounting and Reporting Part 1 LECTURE...

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2017 ZEUS VERNON B. MILLAN LECTURE AID (Advanced Financial Accounting and Reporting Part 1) AFAR PART 1: Zeus Vernon B. Millan
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Chapter 7 Construction Contracts Related standard: PFRS 15 Revenue from Contracts with Customers Learning Competencies Apply the principles under PFRS 15 to account for revenues from construction contracts. Account for contract costs on construction contracts. Account for onerous construction contracts. Account for variable consideration, contract modifications, and other changes in the transaction price of a construction contract. Account for construction contracts wherein the collectability of contract revenue is uncertain or becomes uncertain AFAR PART 1: Zeus Vernon B. Millan
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PFRS 15 supersedes the following standards: PAS 18 Revenue ; PAS 11 Construction Contracts ; IFRIC 13 Customer Loyalty Programmes ; IFRIC 15 Agreements for the Construction of Real Estate; IFRIC 18 Transfers of Assets from Customers ; and SIC-31 Revenue - Barter Transactions Involving Advertising Services . AFAR PART 1: Zeus Vernon B. Millan
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Applicability of PFRS 15 PFRS 15 shall be applied to contracts wherein the counterparty is a customer . Contract – An agreement between two or more parties that creates enforceable rights and obligations. A contract can be written , oral , or implied by an entity’s customary business practice. Customer – A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. AFAR PART 1: Zeus Vernon B. Millan
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Core principle An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. AFAR PART 1: Zeus Vernon B. Millan
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Steps in the recognition of revenue PFRS 15 requires the following steps in recognizing revenue: Step 1: Identify the contract with the customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation AFAR PART 1: Zeus Vernon B. Millan
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Step 1: Identify the contract with the customer Requirements before a contract with a customer is accounted for under PFRS 15: a. The contract must be approved and the contracting parties are committed to it; b. rights and payment terms are identifiable ; c. The contract has commercial substance ; and d. The consideration is probable of collection . No revenue is recognized if the contract does not meet the criteria above. Any consideration received is recognized as liability.
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