completed contract method of accounting of a construction firm...?

Question

If a co. engaged in construction of residential buildings uses completed contract method of accounting, then should it account for prepaid expenses and outstanding expenses , while the project is still under construction ? Also how should it treat the office expenses / depriciation on assets in the mean time i.e. till the project gets completed

Answer 1

According to IAS 11 Construction Contracts,

16. Contract costs should comprise:
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the contract; and
(c) such other costs as are specifically chargeable to the customer under the terms of the contract.

17. Costs that relate directly to a specific contract include:
(a) site labour costs, including site supervision;
(b) costs of materials used in construction;
(c) depreciation of plant and equipment used on the contract;
(d) costs of moving plant, equipment and materials to and from the contract site;
(e) costs of hiring plant and equipment;
(f) costs of design and technical assistance that is directly related to the contract;
(g) the estimated costs of rectification and guarantee work, including expected warranty costs; and
(h) claims from third parties.

Your prepaid expenses and outstanding expenses are probably office expenses and should still be recorded as such. Direct project costs are taken to construction in progress and there is no such a/c as prepaid construction in progress.

Incidentally, IAS 11 requires the percentage of completion method to be used.