Accounting for Construction
- Free Turnitin report
- 4,00000 + Total Satisfied Students
- 150+ Executives for Support Service
4420 Downloads 11 Pages 2725 Words
Accounting is the measurement, processing and communication of financial information with regard to economic entities. It is segregated into several parts such as auditing, tax and management accounting as well as financial accounting. It plays important role in preparing the financial statement for meeting expectations of different external users such as investors, regulators and suppliers. Generally accounting is facilitated through accounting organizations like accounting firms, professional bodies and standard-setters. Present report is based on comparison of new requirement of International Financial Reporting Standard (IFRS) 15 and 18. In addition to this, critical evaluation of impact of requirements of IFRS 15 on entities has been done.
International Financial Reporting Standard consists of set of regulations which are helpful for businesses to prepare financial statements. It assists organization or accounting department to accomplish objectives and meet expectations of different external parties associated with business (Deumes, 2012). At this juncture, IFRS 15 in construction sector specifies the accounting treatment for all revenue which is incurred from contracts. The new regulations of IFRS are applicable on all businesses that enter into contracts to meet expectations of customers by offering them goods and services. It can be critically evaluated that for application of new requirement scope of other IFRSs such as IAS 17 leases should not be there in a contract. The current standard also offers a model for recognition and measurement of losses as well gains on the sale of certain non-financial assets like property and equipment (Feroz, Park and Pastena, 2008). However, IAS 18 Revenue basically focuses upon accounting requirement with regard to recognition of revenue from rendering services, sale of good and interest as well as dividends. However, revenue is measured at fair value of the consideration in the light of prescribed conditions.
The main aim behind new regulations in the form IFRS 15 are stated as follows which affect entire operation of corporation to a great extent.
The issuance of IFRS 15 was done by joint project of US national standard setters and FASB in order to develop high quality global accounting standard in order to recognize revenue.
The framework will be applicable for all transaction related to construction sector such as capital market and industries as well as other related sector. It will be effective for all associated parties to recognize revenue of long as well as short term contract (Nelson, 2009). It facilitates to improve comparability in the top line financial statements for achieving objectives of firm in an effectual manner. Apart from this,previous revenue Standards like IAS 18 Revenue and IAS11 Construction Contracts are replaced by IFRS 15. Along with that, IFRIC13 Customer Loyalty Programmes and other related sectors are also included which will be ruled by new regulations (Rasid and et.al., 2011). Apart from this, five step procedures will be applied by corporation in order to recognize the reveue incured through contracts. It will be effective for all parties and accpordingly return can be distributed in an effectual manner.
Apart from this, IFRS 15 established framework related to revenue recognition that when revenue is recognized and how the same should be recognized. Here, the first step related to revenue recognition is the identification of contracts with customers. Under this, company will apply the IFRS 15 for each contract between two or more parties. It facilitates to carry out all business activities effectively because focus is also laid on liability of corporations at the time of any kind of modifications (Robertson and Davis, 2012). On the other hand, second step is of identification of performance obligation in the contract wherein a company considers whether customer can get benefit out of good or service on its own or with the availability of resources. On the other hand, it is also identified that whether company’s promise to transfer the good/service is separately identifiable from other promises of the contract or not. For instance, a customers will easily get benefit separately from the supply of brick and construction labour (Amendola and et. al., 2011). At this juncture, company has responsibility to arrange for inputs required to construction of brick wall. It is because all these aspects are applied in the form of input while constructing the wall. In such case, the prime obligation of construction company is to construct brick wall and meet expectations of customers and accordingly revenue will be decided.
In addition to this, determining the transaction price is the third step under which amount of consideration to which company expects to be entitled in exchange for transfer of promised services or services to end user. Generally price of contract remain fixed through which companies can assess the value to be paid by customers for particular deal. Apart from this, allocating the transaction price is the fourth step which each performance obligation is allocated the transaction price (Drake and Fabozzi, 2012). It is done in accordance with stand-alone selling price for respective good or service. The company will estimate or assume the stand-along selling price, if it not given. Similarly, transaction price sometimes consists of variable amount of consideration or discount on specific part of contract. In such kind of situation only specific part of contract will be considered for variable price rather considering the entire contract. This proves to be effective fro all associated parties and accordingly fair value of contract is determined.
Moreover, step five of recognizing revenue in IFRS 15 is of recognition of revenue after satisfaction of performance obligation. Furthermore, after satisfaction of performance obligation, corporation will select the appropriate measure in order to recognize exact amount of revenue. a company would select an appropriate measure of progress to determine how much revenue should be recognized as the performance obligation is satisfied (Fakhfakh, Zouari and Zouari-Hadiji, 2012). Therefore, appropriate procedure is applied under IFRS 15 for assessing overall revenue associated with all projects of contract except insurance, financial instruments as well as leases.
According to IAS 18 different transaction like sale of goods, rendering of services as well as use by other of entity assets. All of these transactions or revenue occurred from the same are treated under standard set in IAS 18. However, IFRS 15 deals with all contracts related to customers in construction sector. Though, it excludes some of the below listed aspects-
Hence, IFRS 15 mainly deals in contracts with customers and recorded all related transaction or income generated from the same (Gitman, 2013). It can be critically evaluated that certain contracts are added due to their specific requirement and applicability of specific standards. Apart from this, some of the contracts are out of the scope of as the are already in other category.
On the other, effect of time value of money on revenue will also be considered in both of the regulations such as IFRS 15 and IAS 18. Here, IFRS 15 imposes new regulations on contracts through which time value of money will be affected. Under the case of new standard, significant financing component is accounted separately from revenue or earning of contract. It facilitates to meet expectations of all related parties will set the standard procedure for entire sector. It is generally applied to payments in advance as well as in arrears but at the same time exemption are taken into account. Hence, accordingly new guidance may bring some kind of modification in accounting practices (Murphy and Yetmar, 2010). Moreover, in context of accounting for warranties, no any kind of specific guidance is applied in IAS 18, Revenue. Apart from this, under IFRS 15, Revenue from contracts with customers considers accounting for warranties. For example, in case consumer has the option to purchase warranty then it will be considered as distinct service because this is addition to the product which has the functionality described n the contract. Furthermore, entity or construction business is required to perform in accordance with mentioned warranty in contract.
The new standard of IFRS 15 related to warranty distinguishes between warranty of product to meet specific terms and condition attached to product or promise of additional services over a specific product warranty. However, here type of warranty will be assessed by taking into account different factors such as whether the warranty is required by law and the length of the warranty coverage period. It can be critically evaluated that, if buyers are offered option for purchasing warranty then it will always be considered as separate services.
Transaction price under IFRS warranty will be decided by taking into account both assurance and service. It is also possible that both mentioned warranties might consists of both elements in the light of specific objectives. Example can be taken related to both kind of elements that warranty can be offered by focusing upon two aspects such as assurance of quality and free maintenance plan for product or services.
Where a warranty contains both elements, judgment will be needed in order to determine how to allocate the transaction price in a reasonable manner, and this may result in warranties being accounted for differently than at present. Therefore, there are number of changes take place after implementation of IFRS 15 and accordingly replaced the other two mentioned standard through which fair accounting procedure can be explained.
The new regulations and updated requirement of IFRS 15 imposed critical structure for entire construction industry and accordingly management ofbusine4ss will have to take care of the same. However, construction business will require to change its internal record keeping standard by hiring more competent workforce. The inclusion of competent workforce is required for smooth operation of business and accordingly overall rate of return of business will be increased. However, ethical conduct of business will be carried out (IFRS 15 Revenue from Contracts with Customers, 2015). Further, potential account issues were faced with previous standard which were resolved with implemented of this new one. It proves to be effective for business for effective record keeping and meeting requirement of all associated stakeholders. However, issues might be faced in different context of entities. These are explained as follows-
The first one is of system and processes. For this purpose, business will require to modify or re-design their system and processes for completing the internal controlling procedure. At the same time, IT system and other related procedures are updated in accordance with current requirement of IFRS 15.
In order to implement new procedures, entities will have to provide training among those who might get affected because of changes. This consists of accountants, internal auditors and other related parties who directly deal in contracting with customers.
Due to implementation in current procedures of account5ing, significant impact might be seen on key performance indicators of business. Owing to this, business will apply effective strategies through which investors can be informed related to the same effectively (Accointing & Accounting News, 2015).
The effect of IFRS 15 can be seen on bonus and compensation plan under which revenue of workforce might get affect due to changes in revenue. However, they might face issue in completing their targets on right time.
The payment of tax in cash or deferred might be affected because of difference in the timing of recognition. For this purpose, management of entities can be apply their other strategies accordingly and carry out business activities in the same manner
However, IFRS 15 requires active participation of all personnel associated with accounting department in order to disclose all detail information. This aspect is helpful in carrying out all organization activities in an effectual manner. However, IFRS 11 and 18 was criticized because of lack of adequate disclosure requirement and in turn new legislation have been formed for smooth operation of corporation. On the other hand, IFRS 15 set out specific regulations under which management of corporation public all important information in financial statements through which all its users get important information related to revenue, its time, nature as well as uncertainties associated with the same (Amendola and et. al., 2011). Owing to this, entities are required to adopt qualitative or quantitative measure for disclosure of all important information for smooth operation of business and keeping proper related to all business activities.
The company should disclose the information related to final amount of contract, timing and uncertainty related to revenue to all associated parties. Not only this but effect of economic factors on cash flow can be also be explained for better relationship among parties. Furthermore, entities must also disclose the data related to contract assets and liabilities and accordingly balance sheet will also be have its opening as well as closing balance (Fakhfakh, Zouari and Zouari-Hadiji, 2012). At the same time, amount of current year related to the satisfaction of performance obligation in previous year is also shown for transparency and meeting expectations of stakeholders associate with the business. Apart from this, other related to total transaction price allocate to the performance obligation is presented in the report or financial statement for information of related parties. Moreover, data of obligation relating to refunds, return and warranties are presented in the financial statement through which entities can easily build good relation with their customers or other related parties (Winand, Zintz, and Scheerder, 2012). However, this chances will be brought by corporation operating in construction sector for the aim of resolving issues which were faced related to previous transactions. Therefore, disclosure is also important after implementation of new accounting policies in accordance with IFRS 15. Hence, information about performance obligation, reconciliation of contract balance, information about contract with customers and information regarding judgment used is also incorporated in the disclosure procedure of entities.
The aforementioned report concludes that IFRS 15 ensure better accounting activities for ensure construction industry through which revenue recognition will be done easily. It will be effective fro all related parties of business because uncertainty, timing and nature of revenue all will be recognized on prior basis. It can also be said that businesses will face issues in implemented the new accounting policies and accordingly necessary changes will be done on their internal record keeping procedure.
Number of pages: 4
Writer's Qualifications: Ph.D.
23630 DownloadsView or Download
Number of pages: 7
Writer's Qualifications: Graduation
23384 DownloadsView or Download
Number of pages: 6
Writer's Qualifications: Masters
22111 DownloadsView or Download
Number of pages: 9
Writer's Qualifications: Post Graduation
10557 DownloadsView or Download
Get all these features for £54.12 FREEProceed to Order
It’s time to turn to our experts for assignment writing service.