Since LabCo will adopt IFRSs in the coming year, LabCo’s accounting policy and accounting for the Halibut contract may change under IFRSs. Basically, IAS 11 is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Contract revenue should include the amount agreed in the initial contract, plus revenue from alternations in the original contract work, plus claims and incentive payments that (a) are expected to be collected and (b) that can be measured reliably.
Contract costs should include costs that relate directly to the specific contract, plus costs that are attributable to the contractor’s general contracting activity to the extent that they can be reasonably allocated to the contract, plus such other costs that can be specifically charged to the customer under the terms of the contract. [IAS 11. 16] In this case, LabCo make contract entered into was for a fixed price and requires detailed and involved performance specifications.
Upon entering into the contract, LabCo realized that this was a unique arrangement that required a great deal of customer specification in order to meet required performance standards. In practical, LobCo had experienced significant difficulties in the design and manufacture of the six-axis laser cutting machine. And their overall project would incur total costs that would be in excess of the total fixed-fee contract price negotiated with Halibut. Thus, they should make a change on setting contract revenue and total contract cost. Contract cost can be increased due to specifically charged to the customer.