Project Accounting Practices and Accounting Policies – Definitions and Guidance Notes

By | March 13, 2020

The purpose of this guidance note is to provide definitions and guidance for critical accounting practices and to communicate the principal accounting policies.

Responsibilities

The following personnel have responsibilities mentioned in this procedure:

– Corporate Heads of Finance (Chief Financial Officer / Finance Director)

– Project Director/Manager

– Project Commercial Manager

– Finance Manager

Principal Accounting Policies

Accounting policies should be applied consistently. Any queries in this regard shall be referred to the Corporate Heads of Finance.

Basis of Preparation

a) Accounts shall be prepared in accordance with International Financial Reporting Standards.

b) Accounts shall be prepared under the historical cost convention, modified for the fair valuation of certain assets and liabilities.

c) In addition to this procedure, reference should be made to additional Reporting Frameworks that may be published by company.

Revenue/Turnover

a) Revenue comprises the realistic assessment of the internal value (sometimes referred to as adjusted value) of work done, goods sold or services provided. Revenue is measured at the
fair value of the consideration received or receivable.

b) Revenue from construction contracts is recognized in accordance with the policy on construction contracts.

Cost

a) Cost is defined as that expenditure which has been incurred in the normal course of business in bringing the construction project, product or service to its present location and condition.
b) Costs that cannot be related to contract activity or cannot be allocated to a contract are excluded from the costs of the construction contracts and are included in general and administrative expenses.

Interest

Borrowing costs are not capitalized. They are recognized in the income statement in the period in which they are incurred.

Construction Contracts – Revenue and Profit Recognition

a) Where the outcome of a construction contract can be reliably measured, revenue and costs are recognized by reference to the stage of completion of the contract at the balance sheet date, as measured by the proportion that contract costs incurred for work to date bear to the estimated total contract costs. Variations in contract work, claims and incentive payments are included to the extent that collection is probable and the amounts can be reliably measured. Anticipated losses at completion are immediately recognized as an expense in contract costs.

b) Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized to the extent that the recover-ability of incurred costs is probable.

c) Interest costs are recognized in the income statement in the period in which they are incurred, and are therefore excluded from contract costs.

Provisions

a) Provisions are recognized when there is a present obligation as a result of a past event and it is probable that an outflow of economic benefit will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

b) Provisions for future obligations are not raised, but consideration shall be given to whether a contingent liability shall be provided in the notes to the financial statements.

c) There are specific rules regarding the accounting treatment of provisions and, as such, no provisions shall be raised without the prior agreement of the Corporate Heads of Finance.

Foreign Currencies

a) Transactions in currencies other than the entity’s functional currency are recorded at the rates of exchange prevailing on the dates of the transactions.

b) Monetary assets denominated in foreign currencies are translated into the functional currency at the bid rate of exchange ruling at the balance sheet date. Exchange differences arising on re translation are credited or charged against income.

c) Monetary liabilities denominated in foreign currencies are translated into the functional currency at the offer rate of exchange ruling at the balance sheet date. Exchange differences arising are credited to or charged against income.

d) Monetary group assets and liabilities (being group loans, call accounts, equity loans, receivables and payables) denominated in foreign currencies are translated into the functional currency at the mid rate of exchange ruling at the balance sheet date. Exchange differences arising on retranslation are credited to or charged against income except for those arising on equity loans, where the exchange differences are taken directly to equity as part of the foreign currency translation reserve.

e) Exchange differences arising on the settlement of monetary items are credited to or charged against income

Financial Instruments

Financial assets and liabilities are recognised on the balance sheet when the entity has become a party to the contractual provisions of the instrument. Examples of financial instruments, and the
appropriate treatment is summarized below:

  • Contract receivables and retention comprise amounts due in respect of certified or approved certificates by the client or consultant at the balance sheet date for which payment has not been received, and amounts held as retention on certified certificates at the balance sheet date. These are initially recognised at fair value, and are subsequently classified as loans and receivables using the effective interest rate method. Other receivables are recognised at fair value. All receivables should be regularly reviewed for impairment.
  • Cash and cash equivalents comprise cash on hand, demand deposits and other short term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value.
  • Financial liabilities and equity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Trade and other payables are measured at their fair value.

Contracts in Progress

a) Contracts in progress are stated as:

i. Uncertified work

ii. plus Under certified

iii. less Over certified

iv. less Contract advance payments outstanding

v. plus Overstated costs

vi. plus Prepaid costs/Residual value/Spread costs

b) Uncertified work will include the recognised profits or losses as at the balance sheet date.

c) Inventory/Stocks shall be valued at the lower of cost and estimated realizable value.

Property, Plant and Equipment

a) Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss, if any. The cost shall include the purchase price, import duties and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating.

b) Property, plant and equipment are not revalued upwards.

c) Depreciation is calculated on the straight line basis or units of production basis at rates considered appropriate to reduce the book value of each asset to its estimated residual value over its estimated useful life.

d) When the carrying value of an asset is greater than its estimated recoverable amount, an impairment provision is raised immediately to bring the carrying value in line with the recoverable amount.


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