Standard No. 15
(Issued in pursuance of the Minister of Finance Decision No. 165/2002/QD-BTC
dated 31 December 2002)
01. This standard aims to prescribe and guide the principles and methods for accounting revenues and costs related to construction contracts, including: contents of revenues and costs of construction contracts; recognition of revenues and costs of construction contracts to serve as basis for recording accounting books and compiling financial statements.
02. This standard applies to the accounting of construction contracts and compilation of financial statements by contractors.
03. The terms in this standard are construed as follows:
A construction contract is written contract for the construction of an asset or combination of assets which are closely interrelated or interdependent in terms of their designing, technology, function or basic use purposes.
A fixed price construction contract is a construction contract whereby the contractor agrees to a fixed price for the whole contract or a fixed unit price on a finished product unit. In some cases where prices rise high, such fixed price may change depending on contract clauses;
A cost plus contract is a construction contract whereby the contractor is reimbursed the actual costs allowed to be paid, plus (+) an amount calculated in percentage (%) of these costs or a fixed amount of charge.
04. A construction contract may be reached to construct a single asset, such as: a bridge, a building, an oil pipeline or a road or to construct a combination of assets which are closely interrelated or interdependent in their designing, technology, function or basic use purposes, such as: an oil refinery, complex of textile and garment plants.
05. In this standard, construction contracts also include:
(a) Contracts for provision of services directly relating to the construction of assets, such as: consultancy, designing and survey contract; contract for project and architecture management services;
(b) Contracts for restoration or destruction of assets and rehabilitation of environment after the asset destruction.
06. Construction contracts specified in this standard are classified into fixed price construction contracts and cost plus construction contracts. A number of construction contracts have the characteristics of both fixed price construction contracts and cost plus construction contracts. For instance, cost plus construction contracts contain agreement on the maximum price. In this case, contractors need to consider all the conditions prescribed in paragraphs 23 and 24 for recognizing construction contract revenues and costs.
Combining and Segmenting Construction Contracts
07. This standard’s requirements often apply separately to each construction contract. In a number of cases, this standard shall be applied to separate recognizable parts of a separate contract or a group of contracts to reflect the nature of construction contract or group of construction contracts.
08. For a construction contract relating to the construction of a number of assets, the construction of each asset shall be considered a separate construction contract when it simultaneously meets the following three (3) conditions:
(a) Designs and cost estimates are determined separately for each asset and each asset can operate independently;
(b) Each asset may be separately negotiated with each contractor, and the customer may accept or reject the contractual part related to each asset;
(c) The cost and revenue of each asset can be determined.
09. A group of contracts signed with one customer or a number of customers shall be considered a construction contract when they simultaneously meet the following three (3) conditions:
(a) These contracts are negotiated as a package contract;
(b) These contracts are so closely interrelated that they are in fact different components of a project with equivalent estimated gross profits;
(c) These contracts are performed simultaneously or in a continuous process.
10. One contract may include the construction of one more asset at the request of customers or it may be amended to include the construction of such asset. The construction of one more asset shall be only considered a separate construction contract when:
(a) Such asset is greatly different and independent from assets specified in the initial contract in terms of designing, technology and function; or
(b) The price of the contract for construction of such asset is agreed upon, which is not related to the price of the initial contract.
CONTENTS OF THE STANDARD
11. Revenues of a construction contract include:
(a) Initial revenue inscribed in the contract; and
(b) Increase and decrease amounts in the contract performance, bonuses and other payments, provided that these amounts are capable of changing the revenue and can be reliably determined.
12. Revenue of a construction contract is determined as the reasonable value of received or to be-received amounts. The determination of the contractual revenue is affected by many uncertain factors which depend on future events. The estimation must often be corrected upon the occurrence of such events and the settlement of uncertain factors. As a result, the contractual revenue may be increased or decreased in each specific period. For example:
(a) Contractors and customers may agree upon changes and requirements resulting in the increase or decrease of contractual revenue in the next period as compared with the initially agreed contract;
(b) Revenue already agreed upon in the fixed price contract may increase for the reason that prices rise high;
(c) Contractual revenue may decrease due to the contractor’s failure to keep up with the set schedule or to ensure construction quality as agreed upon in the contract;
(d) When the fixed price contract sets a fixed price for a finished product unit, the contractual revenue shall increase or decrease when the product volume increases or decreases.
13. Changes at customers’ requests in the scope of works to be done under the contract. For example: changes in technical or designing requirements of assets and other changes in the contract performance. Such changes shall be accounted into the contractual revenue only when:
(a) It is highly probable that customers accept such changes and revenues arising therefrom; and
(b) Revenue can be reliably determined.
14. Bonuses are supplementary amounts to be paid to contractors if they perform the contracts according to or beyond the requirements. For example, the contract anticipates to pay the contractor a bonus for early contract fulfillment. Such bonus shall be accounted into the contract revenue when:
(a) A number of specific standards inscribed in the contract are surely attained or surpassed; and
(b) The bonus can be reliably determined.
15. Another payment received by the contractor from the customer or another party to offset costs is not included in the contractual price. For example: Delay caused by the customer; errors in technical or designing specifications, and disputes over changes in the contract performance. The determination of increased revenue from the above-said payments depends on numerous uncertain factors and usually depends on the results of many negotiations. Therefore, other payments shall only be accounted into the contractual revenue when:
(a) It is agreed that the customer will accept to make compensation;
(b) Other payments are accepted by the customer and reliably determined.
Costs of construction contracts
16. Costs of construction contracts include:
(a) Costs directly related to each specific contract;
(b) General costs related to activities of the contracts and can be distributed to each specific contract;
(c) Other costs which may be recovered from customers under contractual clauses.
17. Costs directly related to each specific contract include:
(a) Construction site labor costs, including cost for project supervision;
(b) Costs of raw materials and materials, including project equipment;
(c) Depreciation of machinery, equipment and other fixed assets used for the contract performance;
(d) Costs of transport, installation and removal of machines, equipment, raw materials and materials to and from the project site;
(e) Rent for workshops, machinery and equipment for the contract performance;
(f) Expenses for designing and technical assistance directly related to the contract;
(g) Estimated expenses for project repair and maintenance;
(h) Other directly related costs.
Costs directly related to each contract shall decrease when there exist other incomes not included in the contractual revenue. For example: proceeds from the sale of superfluous raw materials and materials, liquidation of construction machines and equipment upon the contract conclusion.
18. General costs related to the activities of construction contracts and can be allocated to each specific contract, include:
(a) Insurance premiums;
(b) Costs for designing and technical assistance not directly related to a specific contract;
(c) General management costs in construction.
The above-said costs shall be allocated by appropriate methods, in a systematic manner and according to rational percentages, and uniformly apply to all costs with similar characteristics. The allocation must be based on the common levels applicable to construction activities. (General costs which are related to activities of contracts and can be allocated to each specific contract, also include borrowing costs if they satisfy the conditions on borrowing costs capitalized under the provisions in the standard "Borrowing costs").
19. Other costs which may be retrieved from customers under contract clauses such as ground clearance cost, implementation cost that customers must reimburse to the contractors as provided for in the contract.
20. Costs which are not related to activities of contracts or cannot be allocated to construction contracts shall not be accounted into construction contract costs. These costs shall include:
(a) General administrative management costs, or research and development costs which must not be paid by customers to contractors as stated;
(b) Selling costs;
(c) Depreciation of machinery, equipment and other fixed assets not used for construction contracts.
21. Contract costs include costs related to contract throughout the period from the contract signing to the contract conclusion. Costs directly related to contract arising in the course of contract negotiation shall also be considered part of the contract costs if they can be separately identified, reliably estimated and it is highly probable that the contract will be signed. If costs arising in the course of contract negotiation have already been recognized as production and business costs in the period when they arise, they shall no longer be considered the construction contract costs when such contract is signed in the next period.
Recognition of Contract Revenue and Expenses
22. Construction contract revenues and costs are recognized in the following two cases:
(a) Where a construction contract stipulates that the contractor is allowed to make payments according to the set schedule, and when the construction contract performance result is reliably estimated, the revenues and costs related to the contract shall be recognized by reference to the completed volume determined by the contractor on the date of compiling financial statement, regardless of whether invoices for payments according to the set schedule have been billed or not and how much money is inscribed on invoices.
(b) Where a construction contract stipulates that the contractor is allowed to make payments according to the value of performed work volume, and when the contract performance result is reliably determined and certified by customers, the revenues and costs related to such contract shall be recognized by reference to the completed work volume certified by the customers in the period and reflected in the billed invoices.
23. For fixed price construction contracts, the contract results shall be reliably estimated when the following four (4) conditions are simultaneously met:
(a) Total contract revenue can be reliably calculated;
(b) Enterprises can get economic benefits from the contract;
(c) Costs for completing the contract and the work already completed at the time of compiling financial statements can be reliably calculated;
(d) Costs related to the contract can be clearly identified and reliably calculated so that actual total contract cost can be compared with the total cost estimates.
24. For cost plus construction contracts, the contractual results shall be reliably estimated when the following two conditions are simultaneously met:
(a) Enterprises can get economic benefits from the contract;
(b) Costs related to the contract can be clearly identified and reliably estimated regardless of whether they are reimbursed or not.
25. The method of recognizing revenues and costs according to the completed contractual work volume is called the completion percentage method. By this method, revenues shall be determined to match arising costs of the completed work volume reflected in the business operation result report.
26. By the completion percentage (%) method, contractual revenues and costs recognized in the business operation result report are revenues and costs of the work volume completed in the reporting period.
27. A contractor may pay for the costs related to the formulation of a contract. These costs shall be recognized as advances if they can be reimbursed. These costs reflect money amounts to be paid by customers and classified as uncompleted construction projects.
28. Construction contract performance results shall only be reliably determined when the enterprises can receive economic benefits from the contracts. In cases where exist doubts about irrecoverability of certain amounts already counted into the contractual revenues and inscribed in the business result reports, such irrecoverable amounts must be recognized as costs.
29. Enterprises can only make reliable estimates of construction contract revenues when reaching agreement in contracts upon the following:
(a) Legal liability of each party for the constructed assets;
(b) Conditions for change of contract value;
(c) Payment mode and time limit.
Enterprises must regularly review and, when necessary, readjust the estimates of contractual revenues and costs in the course of contract performance.
30. Completed work volumes of contracts to serve as basis for determining revenues may be determined by different methods. Enterprises should use appropriate calculation methods to determine the completed work volume. Depending on the nature of construction contracts, enterprises shall select to apply one of the following three (3) methods to determine completed work volumes:
(a) Percentage (%) of costs of the work volume completed at a certain time on the total estimated costs of the contract;
(b) Appraisal of the completed work volume; or
(c) Percentage (%) of the completed construction and installation volume on the total construction and installation volume which must be completed under the contract.
The work-in-progress payments and advances received from the customers usually do not reflect the completed work volume.
31. When the completed work volume is determined by method of percentage (%) between costs of the work volume completed at a certain time and the total estimated costs of the contract, the costs related to the completed work volume shall be accounted into costs until that time. Costs not counted into the contract’s completed work volume may be:
(a) Costs of the construction contract related to future activities of the contract, such as: costs of raw materials and materials already transported to the construction site or spared for use in the contract but not yet installed or used in the course of contract performance, except for cases where such materials are exclusively manufactured for the contract;
(b) Advances to sub-contractors before the sub-contracted works are completed.
32. When the construction contract performance result cannot be reliably estimated:
(a) Revenue shall only be recognized to match the already arising contract costs, the reimbursement thereof is relatively sure;
(b) Contract costs shall only be recognized as in-period costs when they have already arisen.
33. In the initial stage of a construction contract, cases where contract performance results cannot be reliably estimated may often occur. In cases where enterprises can recover already paid contract costs, the contract costs shall only be recognized to the extent that the paid costs can be recovered. When contract performance results cannot be reliably estimated, no profit amount shall be recognized, even though the total costs for contract performance may exceed the total contract revenues.
34. Irrecoverable costs related to a contract must be immediately recognized as in-period costs in the following cases:
(a) There are not enough legal conditions for continuing the contract performance;
(b) The continued contract performance depends on results of the settlement of petitions or opinions by competent agencies;
(c) The contract involves assets, which are likely to be requisitioned or confiscated;
(d) Contracts where the customers cannot perform their obligations;
(e) Contracts where the contractors cannot fulfill or perform their obligations inscribed therein.
35. When uncertain factors related to the reliable estimation of contract performance results are eliminated, revenues and costs related to construction contracts shall be recognized to match the completed work volume.
Changes in estimation
36. The completion percentage (%) method shall be based on accumulation from the construction commencement to the end of each accounting period in respect of estimates of construction contract revenues and costs. Effect of each change in the estimation of contract revenues or costs, or effect of each change in the estimation of contract performance results shall be accounted as an accounting estimation change. Changed estimates shall be used in determining revenues and costs recognized in the business result report in the period when such changes occur or in subsequent periods.
37. Enterprises shall have to present in their financial statements:
(a) Method for determining revenues recognized in the period and method for determining the completed work volume of a construction contract;
(b) Construction contract revenues recognized in the reporting period;
(c) Total accumulated construction contract revenue recognized up to the reporting time;
(d) Payables to customers;
(e) Receivables from customers;
For contractors receiving work-in-progress payments as provided for in construction contracts (except for cases specified in Paragraph 22a), the following norms shall also be reported:
(f) Receivables according to scheduled progress;
(g) Payables according to scheduled progress.
38. Payables to customers are amounts received by contractors before corresponding work of the contract is performed.
39. Receivables from customers are amounts already inscribed in invoices of payments according to the scheduled progress or value of performed volume, which shall not be paid until the payment conditions prescribed in contracts are fully met or errors are corrected.
40. Receivables according to the scheduled progress is the difference between the total accumulated revenues of the construction contract recognized up to the reporting time, which is larger than the accumulated amount inscribed in invoices of payments according to the scheduled progress of the contract.
This norm applies to on-going construction contracts whereby accumulated revenues already recognized are larger than accumulated amounts inscribed in invoices of progress payments up to the reporting time.
41. Payables according to the scheduled progress is the difference between the total accumulated revenues of the construction contract recognized up to the reporting time, which is smaller than the accumulated amount inscribed in invoices of payments according to the scheduled progress of the contract.
This norm applies to on-going construction contracts whereby accumulated amounts inscribed in invoices of progress payments exceed accumulated revenues recognized up to the reporting time.