ICDS-III with comparison to Notified AS

This is a part of series of articles where we explain the ICDS & certain differences between the ICDS and corresponding Notified AS. We have covered ICDS-I vs AS-1 & ICDS-II vs AS-2   in our previous writes. In this article, we shall take up the ICDS III and its comparison with the corresponding AS.

ICDS III Construction Contracts

ICDS III deals with the determination of income earned from construction contracts. For this ICDS, construction contracts are classified under fixed-price contracts and cost-plus contracts.

Fixed Price Contract– The contractor agrees to receive fixed rate per unit of output or fixed price for the whole contract.

Cost Plus Contract – The cost with a defined percentage markup on the cost is reimbursed to the contractor.

Segmenting Construction Contracts:

• If the contract consists of the construction of a number of assets, then the construction of each of these assets should be treated as a separate contract when either of the following is satisfied:
  • Separate costs and revenues have been identified for each asset
  • Separate proposals have been made for each asset
  • Separate negotiations have been made for each asset
• A group of contracts with one or more customers will be treated as a single contract, when:
  • Negotiations have been made as a single contract for all the contracts involved
  • Contracts are performed on a continuous basis,
  • All the contracts are interlinked to each other as they are part of single contract
• The construction of additional asset at the option of customer will be treated as separate contract, when:
  • The asset is different in the aspects of design, technology or function from any other asset covered under the same contract
  • The price of the asset is negotiable

Contract Revenue

The recognition of contract revenue will be done when there is a 100% guarantee that the contract revenue will be collected. Contract revenue shall include initial amount agreed on the contract, retention money, claims, incentive payments and variations, if any. If the contract revenue amount becomes uncollectible after recognizing it as income in the books of accounts then such amount will be written off as  an expense and not as an adjustment to the contract revenue amount.

Contract Cost

Contract Cost shall include:

• Costs that are directly related to the specific contract
• Costs that are attributable and allocated to the activities involved in the contract
• Other costs that are specifically charged to the customer as per the terms and conditions of the contract
• Any interest on loan or other borrowed cost as recognized by ICDS IX on the borrowing cost
• Costs attributable to a contract for the period from the date of securing the contract to the completion of the contract, including cost incurred to secure the contract.
• Contract cost shall not include costs which cannot be attributed to any activity involved in the contract.

Method to recognize contract revenue and expense

The Contract revenue and expense should be recognized as revenue and expense based on the stage of completion of the contract. This method is called percentage of completion method. The stage of completion of the contract shall be determined with reference to the part of contract costs incurred to complete a certain set of activities up to the reporting date, surveys of work performed and the physical part of contract work completed.

In the initial stages of contract, when the revenue cannot be estimated with certainty then the revenue should be recognized to the extent of contract cost. The initial stage of the contract shall not extend beyond 25 % of the stage of completion.

Disclosure

The contractor should disclose:

• The amount of contract revenue recognized as revenue, amount of contract cost incurred and profit recognized in the reporting period
• The method used to determine the stage of completion of contracts
• Amount of advances received
• Amount of retentions (amount billed for work done but still not received to the satisfaction of the conditions specified in the contract)

Comparison of ICDS III and AS 7

Sl. No.	Basis	ICDS III	AS 7
1.	Contract revenue	Contract revenue includes retention money	It does not specifically mention about retention money as part of contract revenue.
2.	Borrowing cost	Borrowing cost forms part of the contract cost.	AS 7 does not specifically provide for borrowing cost being part of the contract cost.
3.	Initial stage of contract	Initial stage of contract shall not extend beyond 25% of the total contract completion stage.	It does not define any percentage for the initial stage of contract.
4.	Expected loss	ICDS does not provide for recognition of any expected loss.	All the expected losses should be recognized fully and not in proportion to percentage of completion.

For further reading on these series, check out our next article on ICDS IV.