Measure work performed, then test the entire contract for loss
Under AS 7, when the contract outcome is reliably estimable, recognise contract revenue and expenses by reference to the stage of completion at the reporting date. A probable expected overall loss is recognised immediately; it is not limited to the percentage of work completed. Progress billings, customer advances and cash receipts may differ materially from earned revenue.
Confirm AS 7 applies to the contractor and contract
AS 7, Construction Contracts, in ICAI’s official compendium applies to contractors’ financial statements for construction contracts within its scope. The examples assume an entity applying AS rather than Ind AS, an identified contract that has been appropriately combined or segmented if necessary, and no tax computation. Do not apply the figures directly to a developer’s property-sale arrangement or an Ind AS 115 contract without first establishing the applicable framework. Sources were checked on 22 October 2026.
Paragraphs 21–23 specify the reliable-estimation conditions, including reliable contract revenue, probable economic benefits and suitable cost and completion measurement for a fixed-price contract. Contract revenue can include qualifying variations, claims and incentives under paragraphs 10–14, but a contractor’s request alone does not establish recognition. Keep approved and assessed amounts separate from disputed or insufficiently supported claims.
A cost-based percentage must exclude costs that do not represent progress
Paragraph 29 permits methods that reliably measure work performed, including the proportion of costs for work performed to estimated total contract costs, surveys and physical progress. The method must suit the actual work. Paragraph 30 excludes future-activity amounts from the incurred-cost numerator, including the specified uninstalled materials and advances to subcontractors before work, subject to the standard’s stated qualification for specially made materials.
Reconcile costs incurred to amounts representing work performed, future-activity assets, non-contract expenses and other adjustments. A large materials purchase or supplier advance can consume cash without establishing equivalent progress. The estimated total cost should include the supported costs required to finish; do not reduce the denominator merely to raise the percentage. Separately assess recoverability and the correct accounting for future-activity costs.
Use a cumulative working when estimates change
Paragraph 37 applies the method cumulatively using current revenue and cost estimates. Recalculate cumulative recognised revenue and costs at the reporting date, then deduct amounts recognised in earlier periods to derive the current-period entries. A change in estimate can reduce current-period margin even where the contract still has an expected total profit. Do not simply apply the old margin percentage to this year’s spending.
Retain the previous approved estimate, the updated completion budget, the change explanation, and evidence of management’s assessment. A change in estimate is not automatically a prior-period error. Conversely, calling a known earlier omission a new estimate does not decide its accounting treatment. The file should distinguish genuinely new information from an error in the earlier records.
Recognise losses and uncertain outcomes under their own rules
Paragraphs 35–36 require a probable excess of total contract cost over revenue to be recognised as an expense immediately, irrespective of whether work has commenced, the stage reached or profit on other contracts not appropriately combined with this contract. Deduct any loss already recognised when calculating the additional charge so that the expected loss is not counted twice.
Where the outcome cannot be estimated reliably, paragraph 31 permits revenue only to the extent of incurred costs whose recovery is probable and requires incurred contract costs to be expensed. That does not justify a speculative profit margin. Any probable expected overall loss still requires immediate recognition. Uncertainty about collection of revenue already recognised is also addressed separately by paragraph 27; it is not always a reason to rewrite the original stage calculation.
Reconcile billing, retentions and the contract position
Paragraphs 38–43 require the relevant revenue, method and contract-in-progress information, including advances and retentions, and the gross amounts due from and due to customers for contract work. Calculate the contract position using the standard’s components and review contracts individually before presentation. A retained billed amount can remain a receivable while the same contract has billings ahead of earned work; those figures answer different questions.
Build one contract schedule with contract revenue estimate, total cost estimate, progress method, cumulative work costs, revenue recognised, profit/loss, billings, cash, retention and advances. Reconcile it to the project ledger and final notes. Keep GST, withholding, income-tax adjustments and financing effects in separate workings; they are excluded from the simplified numerical cases below.
Worked illustrations
The following cases use fictional figures and stated assumptions. Amounts are Indian rupees unless a different unit is expressly shown. They illustrate preparation controls and do not represent real client results.
Illustrative example 1: a profitable contract under cost-to-cost measurement
All amounts in this example are ₹ lakh. Supported contract revenue is 100, estimated total cost 80 and costs representing work performed 24. Completion is 24/80 = 30%. Cumulative revenue is 100 × 30% = 30, expense 24 and profit 6. This assumes reliable estimation and that cost-to-cost measures performance appropriately.
Illustrative example 2: uninstalled ordinary materials do not automatically establish progress
Amounts are ₹ lakh. Contract revenue is 100 and total estimated cost 80. Costs incurred are 16, including 4 of recoverable ordinary materials at site not installed or used, not specially made for the contract. Costs reflecting work performed are 12; completion is 12/80 = 15%. Revenue is 15 and the stated work expense 12, giving profit 3. The 4 of future-activity material cost is assessed separately as an asset under the stated recoverability facts, rather than used to inflate progress to 20%.
Illustrative example 3: recognise the full expected loss without double counting
Amounts are ₹ lakh. Contract revenue is 100, estimated total cost 110 and completed-work cost incurred 22. A supported cost method gives 20% completion and revenue 20. The ordinary stage result is a loss of 2. Total expected contract loss is 10, so an additional loss charge of 8 is required to bring cumulative loss to 10, assuming no earlier loss provision. Recording the entire 10 again on top of the 2 would overstate loss.
Illustrative example 4: an uncertain outcome does not support a profit margin
Amounts are ₹ lakh. Outcome cannot be estimated reliably; incurred contract costs are 18, of which recovery of only 15 is probable on the stated evidence. Recognise revenue 15 and expense 18, giving loss 3, with any further probable overall expected loss assessed separately. Billing 20 would not justify revenue 20 or a profit 2 merely because the customer was invoiced.
Illustrative example 5: a revised estimate affects the current period cumulatively
Amounts are ₹ lakh. Contract revenue remains 100. Previously, cumulative cost 24 and estimated total cost 80 supported revenue 30 and profit 6. At the next close, cumulative work cost is 45 and revised estimated total cost 90. Progress is 50%, cumulative revenue 50 and cumulative profit 5. Current-period revenue is 50 − 30 = 20; cost is 45 − 24 = 21, giving a current-period loss of 1. The contract still has estimated total profit 10; that does not guarantee profit in every intervening period.
Illustrative example 6: retention and overbilling are separate reconciliations
Amounts are ₹ lakh. Contract revenue estimate is 120, total cost estimate 90 and completed-work cost 36. Completion is 40%, earned revenue 48 and recognised profit 12. Progress billings are 50; cash received 45 and a properly supported billed retention 5 remains receivable. The contract-work position is cost 36 + profit 12 − billings 50 = minus 2, or 2 due to customers under the stated AS 7 working. The retention receivable 5 is not automatically offset against that 2. No other advances or balances are assumed.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Confirm AS 7 and contractor/contract scope. | Framework and contract-identification memo. |
| 2 | Assess combination or segmentation where relevant. | Contract terms and project structure. |
| 3 | Support recognised contract revenue and changes. | Agreement, variations and claim evidence. |
| 4 | Update total contract-cost estimates. | Completion budget and cost-to-finish records. |
| 5 | Identify costs that reflect work actually performed. | Project-cost and future-activity reconciliation. |
| 6 | Validate the chosen progress method. | Cost, survey or physical-performance evidence. |
| 7 | Calculate cumulative recognition and current-period movements. | Prior and current contract schedules. |
| 8 | Test probable total losses and earlier provisions. | Expected-loss and no-double-counting working. |
| 9 | Reconcile billings, receipts, advances and retentions. | Invoice and collection bridge. |
| 10 | Complete due-from/due-to presentation and disclosures. | Final notes and ledger reconciliation. |
Sixteen practitioner FAQs
1. Do customer invoices determine contract revenue?
No. Apply the appropriate recognition method and conditions; billing can be ahead of or behind performance.
2. Does cash collection prove the stage of completion?
No. AS 7 expressly notes that progress payments and advances may not reflect work performed.
3. Is cost-to-cost compulsory for every contract?
No. Select the method that reliably measures the actual work; survey or physical progress can be appropriate.
4. Are all site materials part of the progress numerator?
No. Apply paragraph 30 to future-activity materials and its specific qualification for specially made materials.
5. Do subcontractor advances automatically represent progress?
No. Payments before the subcontract work is performed require the paragraph 30 analysis.
6. Can an unapproved claim be added merely because it was billed?
No. Apply the specific probability and reliable-measurement conditions for the claim.
7. Is an estimate change always a prior-period error?
No. Distinguish genuinely revised information from an error in the earlier records.
8. How is current-period revenue derived after an estimate change?
Recalculate cumulative revenue using current estimates, then subtract the amount previously recognised.
9. Can a profitable contract show a period loss?
Yes. A cumulative estimate revision can reduce recognised profit compared with the prior closing position.
10. Is expected total loss limited to completion percentage?
No. A probable overall expected loss is recognised immediately under paragraphs 35–36.
11. Can profit on an unrelated contract offset that requirement?
Not merely because both belong to the same enterprise. Apply the standard’s contract-combination rules.
12. How is double counting of loss avoided?
Reconcile loss already recognised or provided before calculating the additional charge needed.
13. What if the contract outcome is not reliably estimable?
Recognise revenue only to the extent of incurred costs whose recovery is probable, expense incurred costs and assess expected loss separately.
14. Is a retention identical to unbilled revenue?
No. A retention is part of progress billings withheld under contract conditions; identify the actual right and billing status.
15. Does an overbilled contract eliminate a separate retention receivable?
Not automatically. Reconcile the receivable and contract-work position separately and apply presentation requirements.
16. Can this book working be used unchanged for tax?
No. GST, withholding, income-tax rules and any applicable ICDS need their own analysis and reconciliation.
Organising the supporting working
Keep the underlying records, calculation and conclusion linked to the same entity and period. When organising work with assureFinancials and the assureOffice tools, retain these supporting schedules alongside the final output and use only the features confirmed for the version available to you.
Conclusion
A reliable contract close explains performance, the latest estimate, the full expected-loss assessment and the billing-to-cash bridge. Reconcile cumulative amounts before posting the current-period entries so neither invoices nor an old margin formula determine revenue by default.