AS-7 Construction related Contracts How to do the Costing provisions
We Created this new page to help people who face the problem of
a) Retention Money by customer
b) Long Term Contracts
c) Income and Expense does not happen in same month/Quarter or even same year.
What does the law say ? and how to Follow the correct Accounting Standard. ( AS-7)
This is Useful for all companies in Engineering Construction,
companies in Manufacture of Large Machines,
companies in Delivery of Larger Projects
We all know that Engineering Contract companies face this problem. They always have Retention Money coming after months or years.
How to Follow AS-7 ?
Retention Money cases…
How to make Provision for Service Costs and Warranty Claim Costs ?
| Example 1 | ||||||
| Recognition of Contract Revenue and Expense | ||||||
| purpose : Profit for this year, as per AS-7 | ||||||
| Project A | Project B | |||||
| Amount | Amount | |||||
| Estimated Contract Price | 85,00,000 | 1,50,00,000 | ||||
| A. | Total Cost Incurred | 64,99,000 | 64,99,000 | |||
| B. | Expected Cost to be incured | 32,01,000 | 32,01,000 | |||
| Total | 97,00,000 | 97,00,000 | ||||
| C. | Percentage of Completion | 67.00% | 67.00% | |||
| D. | Revenue for the year | 56,95,000 | 1,00,50,000 | |||
| ( this is above percent of total contract) | ||||||
| E. | Less Cost incurred in current Year | 64,99,000 | 64,99,000 | |||
| F. | Profit or loss for the year | Loss Rs (-) 8,04,000 | Profit Rs 35,51,000 | |||
( Example on Future loss, provision… in the excel file attached … link at the bottom of this post )
Decision in short
As per Accounting Standard AS-7, you have to accrue the loss for the financial year, as per percent of completion method
As per Accounting Standard AS-7, you have to accrue the loss future years also , during this financial year, as per percent of completion method
The Income tax authority is also required to allow “all expenses”
that are normal and shall be incurred
There is no requirement that it must be incurred right now
The provision for future expense is allowed
In case your buyer has already asked for and you have made the Tax invoice for any part of the Contract … ( example 100% billing done), or 50% billing done case,
if the income is already booked
there is no doubt what so ever, that all the connected expenses
both already incurred
and yet to be incurred
must be booked in the books
Please note that if you do not follow the AS-7
your Balance Sheet is not True and Fair
your Auditor Report is also incomplete without the mention of this non compliance
Apprehension of Unascertained Expense / Unascertained Liability will not be allowed ??
This doubt or apprehension is not correct. See the link below
Brief of the Case Delhi High Court held In the case of M/s. Aggarwal And Modi Enterprises (Cinema Project) Co. Pvt. Ltd Vs. CIT that whether a liability is ascertained or contingent is dependent on the facts of each case. Merely because a liability may be contractual or non-statutory would not make it incapable of being ascertained. Where an Assessee follows the mercantile system of accounting it is not necessary that the liability must have actually been incurred during the AY in question to enable the Assessee to claim it as an expense or deduction as the case may be. The crux of the matter is the reasonable certainty with which the liability can be ascertained.
Read more at: https://taxguru.in/income-tax/unascertained-liability-claimed-expense-estimated-mercantile-system-accounting.html
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Want an Excel format to do this properly ? download from the link below
Excel link : AS-7 Construction related Contracts How to do the Costing provisions
We Created this new page to help people who face the problem of
a) Retention Money by customer
b) Long Term Contracts
c) Income and Expense does not happen in same month/Quarter or even same year.
What does the law say ? and how to Follow the correct Accounting Standard. ( AS-7)
This is Useful for all companies in Engineering Construction,
companies in Manufacture of Large Machines,
companies in Delivery of Larger Projects
Contact us page click here
www.mlgassociates.org and www.mlgassociates.in
