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Accounting for Long Term Contracts Frs 102

Accounting for Long-Term Contracts: FRS 102

Long-term contracts are an essential part of many businesses, especially those in the construction and real estate industries. Such contracts typically extend over a year and involve significant resources, both human and financial. Accounting for these contracts requires careful consideration of various factors, including revenue recognition, expenses, and profit recognition. In this article, we will explore the accounting requirements for long-term contracts under FRS 102, the UK Generally Accepted Accounting Practice (GAAP).

Revenue Recognition

Under FRS 102, revenue from long-term contracts must be recognized based on the percentage of completion method (PoC). This method requires the recognition of revenue and expenses based on the proportion of work completed. The proportion of completion can be determined by comparing the costs incurred to date with the total estimated costs of the contract.

In some cases, it may be challenging to determine the proportion of completion. For example, when the contract involves a series of distinct activities, or the contract price varies significantly from the cost of the work performed, the revenue must be recognized based on the stage of completion of each activity or based on the outcome of the contract.

Expenses

Expenses related to long-term contracts must be accounted for based on the actual costs incurred to date. These include direct costs related to the contract, such as labor, subcontractors, materials, and overhead expenses directly attributable to the contract. Indirect costs that cannot be directly attributed to the contract must be allocated using an appropriate method.

It is essential to note that expenses that do not relate to the contract, such as general and administrative expenses, should be charged to the income statement in the period in which they are incurred.

Profit Recognition

Profit recognition on long-term contracts must be determined based on the percentage of completion method and the guidance provided under FRS 102. The profit recognized must be the proportionate share of the total estimated profit related to each activity completed on the contract.

It is also essential to note that if the actual costs of the contract exceed the estimated costs, the company must recognize a loss in the period when the loss becomes evident.

Conclusion

In conclusion, accounting for long-term contracts requires careful consideration of various factors, including revenue recognition, expenses, and profit recognition. Under FRS 102, revenue from long-term contracts must be recognized based on the percentage of completion method, and expenses must be accounted for based on actual costs incurred. Profit recognition must also be determined based on the percentage of completion method and the guidance provided under FRS 102.

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