MFRS 111 Construction Contracts

MFRS 111
CONSTRUCTION CONTRACTS
DEFINITIONS
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 their ultimate
purpose or use’.
Fixed cost contract is ‘a construction contracts in which the contractor agrees to a

fixed price or a fixed rate per unit of output, which in some cases is subject to cost
escalation clauses’.
Cost plus contract is ‘a construction contract in which the contractor is

reimbursed for allowable or otherwise defined costs, plus a percentage of these
costs or a fixed fee’.
 For
example, the contract price is cost plus RM500,000. If the total costs were to be
RM5 million then the contract price is RM5.5 million.
 Some contracts may have features of both fixed and cost plus contracts. For example, a
cost plus contract may have a maximum price.
A Single Contract that Covers a Number of Assets
Where a single contract covers identifiable assets then the construction

of each asset is treated as a separate contract provided:
 Separate proposals were submitted for each asset;
 Each asset was negotiated separately and the contractor and
customer could have accepted or rejected the contract for each part
of the asset; and
 The revenue and costs for each component can be identified.
Construction Of A Group Of Assets Treated
as a Single Contract
Regardless of whether it is a contract with a single or a

number of customers, the contract will be treated as a
single contract provided:
 The group of contracts were negotiated as a single
contract;
 The contracts are closely interrelated and are in
effect part of a single asset with an overall profit
margin; and
 The contracts are performed concurrently or in a
continuous sequence.
ZEE is going to build the Ampang Sentral, which comprises a
shopping mall from the ground floor to the fourth floor and offices
from the fifth floor to the fortieth floor.
Tenders were invited and Con lay Bhd was awarded the contract for
RM300 billion. The project is expected to take three years to
complete.
Required:
Determine whether the construction of the shopping mall and office
are separate contracts.
Answer
They should be considered as a single contract. The construction of the
shopping mall and offices was subjected to a single negotiation or
tender process. The revenue and costs of the shopping mall and the
offices cannot be identified separately as the tender is for the whole
project.
Contract Revenue
The contract price comprises:

 initial agreed price, and
 variations to the price due to variations in contract
work, claims and incentive payments.
 In compliance with the revenue recognition criteria, the inflow of revenue
due to variations should be probable and the amount can be measured
reliably.
Variation and Claims
Variations
Variations to contract work are changes to the scope of work requested by the
customer. The variation may increase or decrease the contract price. The variation
is included in the contract price only if:
 It is probable that the customer will approve the change to the contract price, and
 The amount can be measured reliably.
Claims
Claims are amounts that the contractor seeks to collect from the
customer or third-party for costs not included in the contract price.
Claims are only included in the revenue when:
 It is probable that the customer will accept the claim as when
negotiations have reached an advanced level, and
 The amount can be measured reliably.
Contract Costs
a. Costs directly attributable to the contract
 Examples of such costs are site labour costs (including supervision),
material used, depreciation of property, plant and equipment etc
b. Costs that are attributable to the contract but have to be allocated to the
contract.
 In general these costs are incurred for a number of activities but have to be
allocated to specific contracts. Examples of such costs are insurance,
design costs and construction overhead.
c. Other costs that are specifically chargeable to the customer.
Examples of such costs are development costs.
Recognition of Contract Revenue
and Expenses
Percentage Of Completion Method
Under the percentage of completion method, revenue and expenses are

recognised as the contract progresses based on the amount of work completed.
Where the total contract revenue exceeds total contract costs, then the profit is
allocated by reference to the stage of completion.
On the other hand, if the total contract cost exceeds total contract
revenue the loss is recognised immediately.
YYY Bhd undertook a project where the contract price was RM30
million and the estimated total costs were RM25 million. By the end
of the first year, 40% of the work was completed.
Determine the revenue, costs and profit recognised in the first year.
The revenue = 40% x RM30 million

= RM 12 million.
Cost = 40% x RM25 million
RM 10 million.
Profit = RM12 million – 10 million
= RM2 million
Determining The Stage Of
Completion
The 3 methods are:
Proportion of contract costs incurred to date for work performed to total
contract costs,
Surveys of work performed, or
Physical proportion of contact work completed.
Outcome Cannot be Estimated

If the outcome of the contract cannot be estimated reliably:
 revenue recognised in the income statement is limited to the
amount of costs incurred that is probable to be recovered; and
 costs recognised is costs incurred.
Progress Billings
 invoices requesting payment for work completed to

date
 The gross amount due from customers is the
excess of cost incurred plus recognised profit less
recognised losses over progress billings.
(CURRENT ASSETS)
 The gross amount due to customers is the excess
of progress billings over cost incurred plus
recognised profit less recognised losses.
(CURRENT LIABILITY)
Revenue recognised based on cost incurred to date
bears to total estimated costs
= Cost to date
total to date + cost to complete
= xx %
End of first year of contract the following information is available
Contract price RM100 million
Cost to date RM20 million
Estimated cost to complete RM60 million
Progress billings RM21 million
Percentage of completion
20m ____ x 100 = 25%
60m+ 20m
Income Statement
Revenue (RM100m x 25%) RM25 million
Cost (RM80 x 25%) RM20 million
Profit RM5 million
Statement of financial position
Current assets
Amount due from customer RM4 million
Working:

profit to date RM5 million
RM25 million
Less progress billings (RM21 million)
Contract price RM100million, total estimated cost RM70 million
31.12.2018
Cost incurred to date RM28 million
Estimated costs to complete RM42 million
31.12.2019
Variations to contract price RM5 million
31.12.2018
28m x 100 = 40%
28m+ 42m
Income Statement
Cost (RM70 x40%) RM28 million
Profit RM12 million
Current assets
Working:
Attributable profit to date RM12 million

RM40million

2019
Contract price RM100million, total estimated cost RM70 million
Variations to contract price RM5 million

60 x 100 = 80%
60+15
Year 2
Statement of Profit or Loss
RM million RM million
Revenue to date (105m x 80%) 84
Less: revenue recognised in previous periods (40)

Recognised for 2019 44
Cost to date (75m x 80%) 60
Cost recognised in previous periods (28) (32)
Profit 12
Statement of Financial Position
Current liability
Amount due to customers RM2 m
Working:
Cost to date RM 60 million

Profit to date (12m + 12m) RM 24 million
RM 84 million
Amount due from customer (RM2 million)
Revenue recognised based on value
of work done/surveys
Formula
Work of value survey x 100

Total cost
example 6
Agreed contract price RM150 million

Total estimated cost RM130 million
At the end of first year:

Estimated cost to complete RM100 million
Value of work certified RM 30 million
% of completion = RM30m / RM150m x 100

= 20%
Statement of Profit or Loss
Cost of sales(RM130m x 20%) RM26 million
Profit (RM20m x20%) RM4 million

Current assets
Working:
Attributable profit to date RM4 million
RM34million

MFRS 111 Construction Contracts

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MFRS 111

Fixed cost contract is ‘a construction contracts in which the contractor agrees to a

Cost plus contract is ‘a construction contract in which the contractor is

Where a single contract covers identifiable assets then the construction

Regardless of whether it is a contract with a single or a

The contract price comprises:

Percentage Of Completion Method

Under the percentage of completion method, revenue and expenses are

The revenue = 40% x RM30 million

Outcome Cannot be Estimated

 invoices requesting payment for work completed to

Cost to date RM20 million

Cost to date RM28 million

Attributable profit to date RM12 million

Less progress billings (RM35 million)

Variations to contract price RM5 million

Revenue to date (105m x 80%) 84

Less: revenue recognised in previous periods (40)

Cost to date RM 60 million

Work of value survey x 100

Agreed contract price RM150 million

At the end of first year:

% of completion = RM30m / RM150m x 100

Statement of financial position

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