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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

In 2025-26, Vindhya Engineers Ltd incurred ₹3 lakh on tendering for a bridge contract and charged it to the statement of profit and loss because winning the contract was not then probable. The contract was awarded in 2026-27. How should the ₹3 lakh be treated in 2026-27 under AS 7?

The ₹3 lakh is not included in contract costs in 2026-27. Under AS 7, pre-contract costs can form part of contract costs only if the contract is probable when they are incurred; costs already expensed in an earlier period are not reinstated when the contract is later obtained.

  1. AIncluded in contract costs of 2026-27 by crediting the statement of profit and loss
  2. BCapitalised as a deferred revenue expenditure and amortised over the contract period
  3. CNot included in contract costs, as it was already recognised as an expense in the earlier periodCorrect
  4. DIncluded in contract costs only if the contract price is increased to recover it

Explanation

AS 7 allows costs incurred in securing a contract to be included in contract costs if they can be separately identified, reliably measured and the contract is probable. However, costs already recognised as an expense in the period they were incurred are not included in contract costs when the contract is obtained in a later period. Hence no reinstatement is made.

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