B2W Flipbooks

Page | 33 Scenario A A construction contractor enters into an arrangement to construct a building for $100,000 with original estimated cost to construct the building of $80,000. If at period end the contractor has incurred $40,000 in costs but of the $40,000 in costs $10,000 is wasted costs due to ineffi ciencies that were not included in the pricing of the contract, then only 37.5% ($30,000 cost incurred over the $80,000 total expected costs excluding wasted costs) …or $37,500 should be recognized as revenue. Practical Application Note: Be aware that ineffi ciencies that the contractor anticipated in the contract do not modify the percentage of completion computation. The cost of ineffi ciencies included as costs for reporting purposes but not for measureing performance. Therefore, costs are $40,000 and the job reports a loss in the current period of $2,500 even though it is a profi table contract. Scenario B However, let's change the previous example and of the $40,000 in costs incurred as of period end, $10,000 is wasted costs and another $10,000 is for uninstalled materials purchased and delivered to the construction site, but not yet used in the construction. Should 37.5% or only 28.6% ($20,000 over the $70,000 modifi ed expected costs ($90,000 total estimated costs excluding $10,000 uninstalled materials and excluding $10,000 wasted costs)) of revenue be recognized? Again, judgment is required. If the $10,000 in uninstalled materials meets all of the criteria below then the related costs should be excluded in estimating progress towards completion: • Good(s) are not distinct. • The customer expected to obtain control of the good signifi cantly before receiving the related service (e.g., integration of the goods). • The cost of the goods is signifi cant to the relative total cost of satisfying the performance obligation. • The entity procures the goods from a third party and is not signifi cantly involved in designing or manufacturing the goods, but is still acting as principle (i.e. not an agent transaction). Uninstalled Materials (continued) > IMPLEMENTATION EXAMPLE 2: BUILDING CONSTRUCTION

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