Ias 11 Construction Contracts Work in Progress

IAS 11 Construction Contracts Work in Progress: Understanding the Basics

Construction contracts can be complicated to understand, especially when it comes to recording work in progress and revenue recognition. This is where IAS 11 (International Accounting Standard) comes in. It provides guidelines on how to account for construction contracts and the work that is in progress. In this article, we will delve into IAS 11 and learn about work in progress in construction contracts.

What is IAS 11?

IAS 11 sets out the accounting requirements for the recognition of revenue and the cost of construction contracts. It applies to all types of construction contracts, such as those for the construction of buildings, roads, and bridges, among others. According to IAS 11, a construction contract is an agreement between a customer and a contractor for the construction of assets such as buildings, roads, and bridges.

IAS 11 provides guidance on how to account for construction contracts. This standard requires the use of the percentage of completion (POC) method or the completed contract method to recognize revenue and cost. The POC method recognizes revenue and cost based on the work completed, while the completed contract method recognizes revenue and cost when the project is complete.

What is Work in Progress in Construction Contracts?

Work in progress (WIP) refers to the unfinished work in a construction contract that the contractor has not yet billed to the customer. In other words, it is the amount that remains to be completed on a construction contract. Under IAS 11, WIP is calculated using the POC method. The POC method uses the ratio of work completed to the total estimated cost of the project to calculate WIP.

To calculate WIP, the contractor will need to estimate the total cost of the project and the percentage of work completed at a particular point in time. The percentage of work completed is then multiplied by the total estimated cost of the project to arrive at the WIP.

Why is WIP Important in Construction Contracts?

WIP is an important measure in construction contracts as it provides a snapshot of the work that is currently being done on the project and the amount that is yet to be complete. It helps the contractor to know the amount of work that is remaining to complete the project and provides valuable information for billing the customer.

WIP also helps with the financial planning of the project. By calculating WIP, the contractor can estimate the cost of completing the project and determine the cash flow requirements for the project. This is important for managing the budget and ensuring that the project is completed on time and within budget.

Conclusion

IAS 11 provides guidance on how to account for construction contracts and work in progress. Work in progress refers to the unfinished work in a construction contract that the contractor has not yet billed to the customer. It is an important measure in construction contracts as it provides valuable information for billing the customer and managing the financial planning of the project. By following IAS 11 guidelines, contractors can ensure that they are accurately accounting for construction contracts and work in progress.