The construction industry has a significant role in Queensland's economy, considered one of the four (4) pillars of the Queensland's economy by the State's Premier, and the task of reliably and faithfully accounting for its work-in-progress is subject to some complexity.
There are some key elements determining which Accounting Standards are to be applied when bringing revenue and costs to account.
Before considering accounting for work-in-progress, consider if you even have a construction contract. If the agreement provides the buyer with only limited ability to influence the design and options in a construction project (e.g., such as where a buyer can only pick from a range of options specified by the builder) it is likely that the agreement is in the nature of a 'sales agreement' and therefore would be accounted for in accordance with AASB 118 Revenue as a sale of goods and services (based on application of AASB Interpretation 15 Agreements for the Construction of Real Estate).
In the event it is determined that there is a construction contract to be accounted for in accordance with AASB 111, a business will consider the contract 'revenue'. Contract revenue comprises the amount agreed in the initial contract together with variations in contract work, claims, and incentive payments to the extent that it is probable that they will result in revenues and that they can be measured reliably. Similarly contract costs comprise costs that relate directly to the specific contract, costs that are attributable to general contract activity and that can be reasonably allocated to the contract, together with such other costs as are directly attributable to the customer under the terms of the contract. Contracts are also split into either 'fixed price' or 'cost plus' contracts and, depending on the classification, the related revenues and costs are brought to account in the financial records.
Costs that cannot be attributed to contract activity or cannot be allocated to a contract are excluded from the costs of a construction contract and therefore not included in work-in-progress. Such costs typically include:
- general and administrative costs for which reimbursement is not specified in the contract
- selling costs
- research and development costs for which reimbursement is not specified in the contract
- depreciation of idle plant and equipment that is not used on a particular contract.
Over the last four years the International Accounting Standards Board (IASB) has been developing changes to accounting for revenue and it is likely that these will significantly change the accounting for construction contracts as well as replace both Australian Accounting Standards that deal with revenue, being AASB 118 Revenue and AASB 111 Construction Contracts. This revised standard is expected to be issued in the first quarter of 2014. Regardless of the accounting treatment, there may be some flexibility in how and when amounts are included in assessable income for tax purposes, so it is important to understand these nuances when planning your future cashflows.
It is prudent to consider how these changes in Standards will impact your financial accounts and how to 'normalise' prior periods so comparison is achievable. Also, don't forget that accounting standards rules do not equate to tax rules, so be careful to investigate the tax deductibility of amounts accounted for in work-in-progress. Please contact your Hanrick Curran adviser or ask for Matthew Green on 07 3218 3900 for assistance during this period of change.