contract revenue and expenses are recognised in the income statement in proportion t 612453

The Vitec Group plc (2010)

Notes to the Consolidated Accounts [extract]

2 Accounting Policies [extract]

Long term contracts [extract]

Contract revenue and expenses are recognised in the Income Statement in proportion to the stage of completion of the contract, to the extent that the contract outcome can be estimated reliably. The stage of completion is assessed by reference to surveys of work performed. When the outcome of a long term contract cannot be estimated reliably then contract revenue is only recognised to the value of contract costs incurred to date that are likely to be recoverable. An expected loss on a contract is recognised immediately in the Income Statement.

There are, of course, other ways of measuring work done, e.g. labour hours, which depending upon the exact circumstances might lead to a more appropriate basis for computing revenue.

The above examples apply only to fixed-price contracts. Where a contract is on a cost-plus basis, it is necessary to examine the costs incurred to ensure they are of the type and size envisaged in the terms of the contract. Only once this is done and the recoverable costs identified can the figure be grossed up to arrive at the appropriate revenue figure.

If the stage of completion is determined by reference to the contract costs incurred to date, it is fundamental that this figure includes only those contract costs that reflect work actually performed so far. Any contract costs that relate to future activity on the contract must be excluded. This includes the 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 especially for the contract. Payments made to subcontractors in advance of work performed under the subcontract would similarly not relate to work performed to date and have to be excluded. [IAS 11.31].