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AS 7: Construction Contracts

A professional application note for accounts teams: what the standard controls, where it appears in company accounting, how to apply it and what evidence reviewers expect. Animated notes with Play, Pause, Replay, English and Hindi voice options are included below.

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AS 7: Construction Contracts: interactive explanation

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Professional scope: This is an implementation-oriented explanation for accountants, finance managers, controllers and reviewers responsible for company accounts.

1. What this standard controls

Contract revenue and costs are recognised by reference to the stage of completion when outcome can be estimated reliably, while expected losses are recognised immediately.

Current position: Included in the ICAI Accounting Standards framework, subject to entity applicability, notified rules and later amendments.

2. Where it appears in the real accounting world

01Long-term construction or engineering contracts
02Variation claims and incentive payments
03Cost-to-complete revisions
04Loss-making or delayed projects

3. Practical application workflow

  1. Identify the contract and combine or segment arrangements where appropriate.
  2. Estimate total revenue, total cost and stage of completion using reliable evidence.
  3. Recognise revenue and expense in line with performance.
  4. Recognise expected contract loss immediately.
  5. Reconcile certified work, billing, retention, advances and contract balances.

4. Real-world application example

A contract has revenue of $10 million, estimated cost of $8 million and 40% completion based on reliable cost-to-cost data. Cumulative revenue is $4 million and cumulative cost recognised is $3.2 million, adjusted for amounts already recorded.

5. Journal-entry and accounting record pattern

Progress recognitionDr Contract work-in-progress / contract asset; Cr Contract revenue, with related cost recognition.
Expected lossDr Contract loss expense / Cr Provision for expected contract loss.

Entry wording is illustrative. Actual accounts, tax effects, dimensions and narration depend on the entity’s chart of accounts and facts.

6. Month-end and year-end control file

Controls to operate

  • Approved contract master and change-order log.
  • Independent review of cost-to-complete.
  • Reconciliation of project system to general ledger.
  • Margin movement and loss-contract dashboard.
  • Evidence for claims, incentives and variations.

Common errors and red flags

  • Using billing percentage as stage of completion without analysis.
  • Deferring an expected loss.
  • Including unapproved claims as revenue.
  • Failing to update cost-to-complete estimates.
  • Mixing unrelated contracts in one margin calculation.

7. Reviewer questions

  1. Can outcome be estimated reliably?
  2. What evidence supports stage of completion?
  3. Are variations enforceable and measurable?
  4. Is any total contract loss expected?
  5. Do billing and accounting balances reconcile?

Related standards: AS 5, AS 9, AS 29

Authoritative reference:

Before approving a material conclusion, check the latest ICAI compendium, notified Companies (Accounting Standards) Rules, entity applicability and subsequent amendments.

ICAI Accounting Standards Compendium →
Companies (Accounting Standards) Rules and amendments →

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Professional note: This educational resource does not replace entity-specific analysis, the latest notified standard, law, regulation, audit judgment or professional advice.