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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Gujarat Civil Works Ltd is executing a contract where, because of a legal dispute over the contract's enforceability, the outcome cannot be estimated reliably. Costs incurred to date are ₹60 lakh, of which only ₹50 lakh is probable of recovery from the customer. What should the company recognise for the period?

The company recognises revenue of ₹50 lakh and contract cost of ₹60 lakh, resulting in a loss of ₹10 lakh. When the outcome cannot be reliably estimated, revenue is limited to recoverable costs, while all costs incurred are expensed immediately.

  1. ARevenue ₹60 lakh and nil profit
  2. BRevenue ₹50 lakh, contract cost ₹60 lakh, and a loss of ₹10 lakhCorrect
  3. CRevenue ₹50 lakh, contract cost ₹50 lakh, and nil profit
  4. DNo revenue and no cost until the dispute is resolved

Explanation

When the outcome cannot be estimated reliably, revenue is recognised only to the extent that contract costs incurred are probable of recovery, and all contract costs are expensed in the period. Revenue is therefore ₹50 lakh and the expense is ₹60 lakh, giving a loss of ₹10 lakh. Showing nil profit would ignore the ₹10 lakh of unrecoverable cost, which cannot be deferred.

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