notes to the
financial statements
31 December 2015
2.
Summary of significant accounting policies (cont’d)
Construction contracts
The Group principally operates fixed price contracts. Contract revenue and contract costs are recognised as revenue
and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting
period (the “percentage of completion method”), when the outcome of a construction contract can be estimated
reliably. Contract revenue corresponds to the initial amount of revenue agreed in the contract and any variations in
contract work, claims and incentive payments to the extent that it is probable that they will result in revenue; and they
can be reliably measured. Contract costs include costs that relate directly to the specific contract and costs that are
attributable to contract activity in general and can be allocated to the contract.
The outcome of a construction contract can be estimated reliably when: (i) total contract revenue can be measured
reliably; (ii) it is probable that the economic benefits associated with the contract will flow to the Group; (iii) the costs
to complete the contract and the stage of completion can be measured reliably; and (iv) the contract costs attributable
to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared
with prior estimates.
When the outcome of a construction contract cannot be estimated reliably (principally during early stages of a contract),
contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable and contract
costs are recognised as expenses in the period in which they are incurred.
An expected loss on the construction contract is recognised as an expense immediately when it is probable that total
contract costs will exceed total contract revenue.
In applying the percentage of completion method, the stage of completion is measured by reference to certification
of value of work performed to date. Where there is no certification of value available, the stage of completion is based
on the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.
The Group’s contracts are typically negotiated for the construction of a single asset or a group of assets which are
closely interrelated or interdependent in terms of their design, technology and function. In certain circumstances, the
percentage of completion method is applied to the separately identifiable components of a single contract or to a
group of contracts together in order to reflect the substance of a contract or a group of contracts. Assets covered by
a single contract are treated separately when: (i) separate proposals have been submitted for each asset; and (ii) each
asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that
part of the contract relating to each asset - the revenue and costs of each asset can be identified. A group of contracts
are treated as a single construction contract when: (i) the group of contracts are negotiated as a single package; the
contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin; and (ii)
the contracts are performed concurrently or in a continuous sequence.
Borrowing costs
Borrowing costs are interest and other costs incurred in connection with the borrowing of funds. Interest expense
is calculated using the effective interest rate method. Borrowing costs are recognised as an expense in the period in
which they are incurred except that borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset that necessarily take a substantial period of time to get ready for their intended use or
sale are capitalised as part of the cost of that asset until substantially all the activities necessary to prepare the qualifying
asset for its intended use or sale are complete.
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