Construction: contracts over time

Granite Peak Builders builds commercial premises on the customer's land. A building on the customer's land is an asset the customer controls as it is built, so Granite Peak recognises revenue over time (IFRS 15.35(b)). The accounting each period comes down to four questions.

1. How far along are we? Granite Peak measures progress with an input method: costs incurred to date ÷ total expected costs (cost-to-cost). Costs that don't reflect progress — materials delivered to site but not yet installed, or the cost of wasted work — are excluded from the measure (IFRS 15.B19).

2. What happens when estimates change? Total costs are re-estimated at every reporting date. A change is a change in estimate: Granite Peak computes cumulative revenue to date with the new percentage and recognises the difference from revenue already recognised — a cumulative catch-up in the current period (IFRS 15.43; IAS 8). It never restates prior years.

3. Asset or liability? Revenue recognised and amounts billed (progress billings, often certified by the customer's surveyor) rarely match. For each contract, if revenue to date exceeds billings, the excess is a contract asset; if billings exceed revenue, the excess is a contract liability (IFRS 15.105). Billed but unpaid amounts are receivables; retentions held back by the customer are a receivable only once the right to them is unconditional (only time must pass); while they still depend on completing the work or passing a defects inspection, they remain part of the contract asset — judge them case by case against the contract terms.

4. Will the contract lose money? If the unavoidable costs of meeting the contract exceed the economic benefits expected from it, the contract is onerous and a provision is recognised for the loss (IAS 37.66–69). The costs of fulfilling include both incremental costs and an allocation of other costs directly related to the contract (IAS 37.68A). The effect: the whole expected loss is recognised as soon as it's foreseen, not spread over the remaining work.