Accounting Standards for Enterprises No.
15 - Construction Contracts
Cai Kuai [2006] No.3
February 15, 2006
Chapter I General Provisions
Article 1 In order to regulate the recognition, measure construction contracts of
enterprises (construction contractors, the same below), and disclose the relevant
information, these Standards are formulated according to the Accounting Standards
for Enterprises - Basic Standards.
Article 2 The term "construction contract" means the contract signed for the
construction of an asset or several assets that are closely interrelated in the
matter of their design, technology and function or their ultimate purpose or use.
Article 3 Construction contracts consist of fixed price contracts and cost plus
contracts.
A fixed price contract means a construction contract in which the
construction price is ascertained on the basis of a fixed contract price or a
fixed unit price.
A cost-plus contract means a construction contract in which the construction
price is ascertained on the basis of the costs stipulated in the contract or
costs negotiated otherwise, plus a proportion of these costs or a fixed fee.
Chapter II The Split-up and Combination of Contracts
Article 4 Generally an enterprise shall have accounting treatment in accordance
with each construction contract. However, in some cases, it is necessary to split
up a single contract or combine several contracts in order to reflect the essence
of a single contract or a group of contracts.
Article 5 For a construction contract including several assets; the construction
of each asset shall be treated as a single construction contract when the
conditions as follows are met simultaneously:
(1) Independent construction plan of each asset;
(2) Each asset is needed a separate negotiation with the customer, and the
parties have been able to accept or reject the contract terms pertinent to each
asset; and
(3) The revenue and costs of each asset can be identified separately.
Article 6 The construction of each additional asset shall be accounted for as a
separate contract if either of the conditions is met as follows:
(1) There is great difference between the additional asset and the original
asset under the original contract in terms of design, technology or function; or
(2) It is not necessary to take into account of the original contract price
when the price of the additional asset is separately negotiated.
Article 7 A group of contracts, whether with a single customer or with several
customers, shall be treated as a single construction contract when all of the
conditions are met as follows:
(1) The group of contracts is signed as a package deal;
(2) The contracts are so closely related that they are, in fact, parts of a
single project with an overall profit margin; and
(3) The contracts are carried out concurrently or in a sequential manner.
Chapter III Contract Revenue
Article 8 The contract revenue shall consist of:
(1) The initial amount of revenue stipulated in the contract; and
(2) Revenue incurred by alterations in contract, claims for compensation and
incentive payments.
Article 9 A alteration in a contract is an adjustment by the customer for a change
in the range of the work to be performed under the contract. Revenues incurred by
alterations in the contract shall be recognized when both of the conditions as
follows are met simultaneously:
(1) The customer will approve the amount of revenues incurred by the variation;
and
(2) The amount of revenues can be measured in a reliable way.
Article 10 A claim for compensation is an amount that is not included in the
contract price and which the contractor seeks to charge from the customer or a
third party as a compensation for costs that caused by the customer or a third
party. Revenue incurred by claims should be recognized when both of the
conditions as follows are met simultaneously:
(1) The customer is expected to accept the claims for compensation in
accordance with the situations of negotiations; and
(2) The amount that is accepted by the other party can be measured in a
reliable way.
Article 11 Incentive payments refer to the additional amounts agreed to pay to the
contractor by the customer if the specified performance standards are met or
exceeded. Revenue incurred by incentive payments should be recognized when both
of the conditions as follows are met simultaneously:
(1) The contract has reached a stage of completion so that it can be deduced
that the schedule and quality of the contract will meet or exceed the specified
performance standards; and
(2) The amount of incentive payments can be measured in a reliable way.
Chapter IV Contract Costs
Article 12 The contract costs shall consist of the direct and indirect costs
incurred and related to a contract during the period from the date of the
contract signed to the date of the contract completed.
Article 13 The direct costs under a contract shall consist of the items as
follows:
(l) Costs of materials;
(2) Labor costs;
(3) Utilization expenses of equipment; and
(4) Other direct costs, referring to other expenses that may be directly
included in the contract costs.
Article 14 The indirect costs refer to the costs incurred by organizing and
managing operating activities for construction entity or production entity
subordinate to an enterprise.
Article 15 The direct costs shall be directly included as part of the contract
costs when they are incurred. The indirect costs shall be allocated to the
contract costs in light of a systematic and reasonable method on the date of the
balance sheet.
Article 16 The contract costs may be offset against by any incidental income
pertinent to the contract, such as the income from the disposal of surplus
materials at the end of the contract.
Article 17 The contract costs do not include the costs that shall be included in
the current profits and losses, such as the administration costs, the selling
costs, the financial costs.
The relevant expenses incurred by the sign of a contract shall be directly
included in the current profits and losses.
Chapter V Recognition of Contract Revenue and Contract Costs
Article 18 If the outcome of a construction contract can be estimated in a
reliable way, the contract revenue and contract costs shall be recognized in
light of the percentage-of- completion method on the date of the balance sheet.
The term "percentage-of-completion method" means a method by which the
contractor recognizes its revenues and costs in the light of the schedule of the
contracted project.
Article 19 The outcome of a fixed price contract can be estimated in a reliable
way when all of the conditions as follows are met simultaneously:
(1) The total contract revenue can be measured in a reliable way;
(2) The economic benefits pertinent to the contract will flow into the
enterprise;
(3) The actual contract costs incurred can be clearly distinguished and can be
measured in a reliable way; and
(4) Both the schedule of the contracted project and the contract costs to
complete the contract can be measured in a reliable way.
Article 20 The outcome of a cost plus contract can be estimated in a reliable way
when the conditions as follows are met simultaneously:
(1) The economic benefits pertinent to the contract will flow into the
enterprise; and
(2) The actual contract costs incurred can be clearly distinguished and
measured in a reliable way.
Article 21 The schedule of a contracted project may be ascertained by employing
the methods as follows:
(1) The proportion of accumulative actual contract costs incurred against the
expected total contract costs;
(2) The proportion of the completed contract work against the expected total
contract work; or
(3) Surveys of the work performed.
Article 22 When the schedule of the project is ascertained on the basis of the
proportion of accumulative actual contract costs incurred against the expected
total contract costs, the items as follows are excluded from the actual contract
costs incurred:
(1) The construction costs pertinent to future activity under the contract,
such as costs of materials that are not installed or used during the
construction;
(2) The advance payments made to the subcontractors prior to the completion of
the subcontract works.
Article 23 The current contract revenues in the current period shall, on the
balance sheet date, be recognized in accordance with the balance of the total
contract revenues times the schedule of completion then deducting the accumulated
revenue recognized in previous accounting periods. At the same time, the current
contract expenses in the current period shall be recognized in accordance with
the balance of the expected total contract costs times the schedule of completion
then deducting the accumulated expenses recognized in previous accounting
periods
Article 24 For a construction contract completed in the current period, the
balance of the total actual contract revenues deducting the accumulated revenue
recognized in previous accounting periods should be acknowledged as contract
revenues in the current period. Meanwhile, the balance of the accumulated
contract costs incurred deducting the accumulated contract costs recognized in
previous accounting periods should be acknowledged as contract expenses in the
current period.
Article 25 If the outcome of a construction contract can not be estimated in a
reliable way, it shall be treated in accordance with the circumstances as
follows, respectively:
(1) If the contract costs can be recovered, the contract revenue shall be
acknowledged in accordance with contract costs that can be recovered and the
contract costs shall be acknowledged as contract expenses in the current period
they are incurred; and
(2) If the contract costs cannot be recovered, these costs shall be
acknowledged as contract expenses immediately when incurred and no contract
revenue shall be acknowledged.
Article 26 If the uncertainties, which cause that the outcome of a construction
contract can not be measured in a reliable way, have passed out of existence, the
revenues and expenses pertinent to the construction contract shall be
acknowledged in light of the provisions as prescribed in Article 18 of these
Standards.
Article 27 If the total expected contract costs exceed the total expected contract
revenue, the expected loss shall be recognized as the current expenses.
Chapter VI Disclosure
Article 28 An enterprise shall disclose the information concerning the
construction contracts in its notes as follows:
(1) The total contract amount and the methods used to ascertain the schedule of
each contract project;
(2) The aggregate amount of costs incurred and aggregate gross profits (or
loss) acknowledged for each contract;
(3) The settlement amount of each contract; and
(4) The reasons and the amount of the expected loss in the current period.
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