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the following example illustrates the determination of the stage of completion of a 612455

Cumulative example – the determination of contract revenue and expenses

The following example illustrates the determination of the stage of completion of a contract and the timing of the recognition of contract revenue and expenses, measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.

A construction contractor has a fixed price contract to build a bridge. The initial amount of revenue agreed in the contract is €9,000. The contractor’s initial estimate of contract costs is €8,000. It will take 3 years to build the bridge.

By the end of year 1, the contractor’s estimate of contract costs has increased to €8,050.

In year 2, the customer approves a variation resulting in an increase in contract revenue of €200 and estimated additional contract costs of €150. At the end of year 2, costs incurred include €100 for standard materials stored at the site to be used in year 3 to complete the project.

The contractor determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed to date bear to the latest estimated total contract costs. A summary of the financial data during the construction period is as follows:

Year 1

Year 2

YEAR 3

Initial amount of revenue agreed in contract

9,000

9,000

9,000

Variation

200

200

Total contract revenue

9,000

9,200

9,200

contract costs incurred to dare

2,093

( 168

8″700

Contract costs to complete

5,957

2,023

Total estimated contract costs

8,050

8,200

8,200

Estimated profit

950

1.000

1,000

Stage of completion

26%

74%

100%

The constructor uses the percentages calculated as above to calculate the revenue, contract costs and profits over the term of the contract. The stage of completion for year 2 (74%) is determined by excluding from contract costs incurred for work performed to date the €100 of standard materials stored at the site for use in year 3.

The amounts of revenue, expenses and profit recognised in profit or loss in the three years are as follows:

To date

Recognised in prior years

Recognise in
current years

Year 1

Revenue (9,000 x 26%)

2,340

2,340

Expenses

2,093

2,093

Profit Year 2

247

247

Revenue (9,200 x 74%)

6,808

2,340

4,468

Expenses (6,168 incurred less 100 of materials in storage)

6,068

2,093

3,975

Profit

740

247

493

Year 3

Revenue (9.200 x 100%)

9200

6808

2197

Expenses

8,200

6,068

2,132

Profit

1,000

740

260

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