Dear Jim,
Thanks for inviting comments on the practice on Construction Accounting.
It is to announced by EU and most other international bodies that International Accounting standards will be followed compulsorily w.e.f 1st January 2004.
IAS 11 is the applicable International Accounting Standard for construction accounting.
Section 31 will answer your queries. For your benefit, I reproduce the same:
"31. When the stage of completion is determined by reference to the Contract Costs incurred to date, only those contract costs that reflect work performed are included in costs incurred to date. Examples of contract costs which are excluded are:
(a) Contract costs that relate to future activity on the contract, such as costs of materials that have been delivered to a contract site or set aside for use in a contract but not yet installed, used or applied during contract performance, unless the materials have been made specifically for the contract; and
(b) Payments made to subcontractors in advance of work performed under the subcontract. "
In case you are not considering the payable in the working of the cost incurred, when the said invoices are relating to the actual work performed, the cost and the percentage of completion of the contract will be understated to that extent.
Though this sounds a conservative approach, is not the correct practice, particularly in cases:
(a) where the contract cost variance are worked out based on financial accounts only,
(b) in cases where the contract may turn out to be onerous,
(c) where the basis applied for considering the percentage completion for revenue is based on actual work performed and the percentage of cost is based on the actual cost booked in the accounts. here, it may distort the accounting statements materially.
As Internal Auditor, we should strive for best practice rather than being trapped by various tricks employed by Accountants in the name of conservative approach.
With my experience of 18 years in auditing of Construction contracts accounting, I can say please beware of such traps and advice for adopting best practices as pronounced by relevant IAS.
hope this will help you solve your problem.
With regards
Kishan Solanki
----------------------------
Kishankumar J. Solanki
Asst. Manager - Group Internal Audit
Mannai Corporation QSC
PO Box 76
DOHA, QATAR
Ph. +974 - 4412555 Ext. 266
Fax. +974 -4429819
Email: [EMAIL PROTECTED]
| "Mahoney, James E" <[EMAIL PROTECTED]>
Sent by: [EMAIL PROTECTED] 24-09-02 07:05 PM
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A question for those of you involved with construction accounting. Is it a common practice for a company to just cut off entries to accounts payable at the end of the calendar month? Someone told me this is done so an to not overstate revenues under the percentage of completion method and it sounded a little odd to me. Any advice would be appreciated.
Thanks
Jim Mahoney
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