In the field of building construction, a contract may sometime extend over two or more years. When that happens, it is necessary to value the work-in-progress at the end of each year. In such a case, it would obviously be incorrect to value the work-in-progress at cost and postpone determination of profit to the year when the construction is finally completed and possession thereof made over, for it will lead to no profit being shown till the final year. Such a procedure will not be acceptable either to the shareholders or to the taxing authorities. One of the methods by which a part of profits can be included in the account of each year is the total profit anticipated in terms of percentage of total construction, computed in physical terms, completed each year. Such a procedure, however, may not yield a satisfactory result where the total income cannot be estimated accurately. In such an event, it is advisable to prepare cost statements and on that basis to compute value of work-in-progress at cost plus the part of the profit attributable thereto. As a general principle, it is imprudent to take credit for any anticipatory profit unless it is possible, reasonably and accurately, to estimate the amount. Even where this is practicable, the amount of profit should be estimated only in respect of instalments of contract price which has accrued or had been collected before the close of the year. In the case of contracts the construction of which is undertaken on the basis of ‘cost plus percentage on cost’ it would not be incorrect to take credit for the percentage of profit on cost actually incurred. For instance, if a factory is being built at ‘cost plus 10% of cost basis’ the process of incurring cost itself will establish a claim against the customer for the amount of such cost plus 10%. In such a case, it would not be incorrect to take credit for the whole of the profit which has actually accrued. In the case of goods produced against a forward contract which are ready for delivery, the same should be valued at the price at which they will be delivered less expenses which will be incurred on their delivery. However, such a basis of valuation should not be adopted where there is any uncertainty regarding the terms of final settlement. For instance, where the buyer has to inspect the goods and he has the right to reject goods considered unsatisfactory, the contract price should not be applied until the goods have been inspected and approved.
(Visited 84 times, 1 visits today)