Financial Accounting Report: Construction Contracts of Two Companies

This report provides an in-depth analysis of construction contracts within the context of intermediate financial accounting, focusing on two Malaysian companies, GDB Holding Berhad and Fajarbaru Builder Group Bhd. It begins with an introduction to the construction industry and the selected companies, detailing their business activities, financial highlights, and locations. The report then explains the different types of construction contracts, emphasizing contract revenues, costs, and the percentage of completion method. It explores the disclosure and presentation of financial information for both companies, including the treatment of contract expenses and revenues. A comparison of the two companies' financial disclosures is also included. The report concludes with key findings, offering a comprehensive overview of the financial accounting practices within the construction industry, and provides a valuable resource for students seeking to understand construction accounting principles and company-specific financial reporting.

INTERMEDIATE
FINANCIAL
ACCOUNTING.

Table of Contents
INTRODUCTION...........................................................................................................................2
1. Introduction of two companies. ..............................................................................................2
2. Explanation of the construction contract.................................................................................3
3. Disclosure and presentation of both companies......................................................................5
4 Comparison of disclosure of both companies..........................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................1
1

INTRODUCTION
The process of constructing, buildings, monuments, and large infrastructure is known as
construction. The concept of construction is totally different from manufacturing such as, it
means production of similar items without a designated purchaser. To understand the importance
of construction two famous companies of Bursa Malaysia are taken into the context.
FAJARBARU and GBD are famous companies of Malaysia that provide their services in
different areas of country (Arnold, 2012).
In this project report, a brief introduction followed by the type of activities, financial
highlights and address is given. An explanation about the construction contract, its revenues, cost
and percentage of completion is discussed. Report also shows disclosure of both companies,
comparison and similarities is focused under this. And at last key finding of the project is been
focused.
1. Introduction of two companies.
GBD Holding Berhad is located in famous area of Malaysia, near Bandar Puteri Puchong.
It is an investment holding company and most of their activities are involved in construction
business in country. The company focus on high-rise residential, commercial and mixed
development project. On the other side FAJARBARU is an organisation that is impelled to
become one of the famous and trusted partner for all construction and property demands holder
in Malaysia. The company is located on 61 & 63, Jalan SS 6/12,Ss 6, Petaling Jaya, Selangor,
Popular cooperate area of country. Fajarbaru Builder Group Bhd is involved in the different
business activities such as investment holding and provision of management services such as
property building and development, construction and trading etc. The Group also shows their
interest and wants to engage in some other activities such as timber logging, trading and logistics
(Banerjee, 2012). In both companies, the property development are one that develop commercial
and residential properties, construction division are basically incurred as general builder in the
construction industry and logging of timber segment is engaged in the extraction of timber. For
financial highlights every company prepare their financial statement such as cash flow, balance
sheet, income statement and ratio analysis. Fajarbaru Builder Group Bhd in financial year 2018
earns a total revenue of about 58864, net profit is 2939, Net profit margin of company decrease
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from 15.66% to 11.6% in year 2018 and Earning per share also shows decrease in rate from 2.76
to 0.56 which means company is not doing as expected to maintain profitability and productivity.
GBD Holding Berhad has a large market capital of about 164 million, their revenue for last
financial year is 298934, net profit margin is 10.52% return on investments is 37.03% and
earning per share is 5.03cent. The net worth of company is 84944 , dividend are paid at 0.26% to
its shareholder, revenue per share is 47.83% and payout are calculated on 0.26% for the
accounting year 2017-18. The balance sheet of Fajarbaru Builder Group Bhd shows cash and
short term investment 49.88 million, total debts are 95.17M, total Liabilities are 212.43M, total
shareholder equity is 287.05M. From the balance sheet of GDB Holding Bhd cash and short
term investment is about 83.32 million, Total debt are nil for the year 2018, total liabilities are
95.22 M, shareholder equity is 91.96 M and values of share as per book record is 0.15.
profitability ratio such as gross margin is 11.71%, operating margin is 1.011% etc.
2. Explanation of the construction contract.
There are basically six types of construction contract, that is develop by mutual and legal
binding agreements among the two parties depended upon construction policies and condition
recorded in the papers. The two parties are owner that wants to construct his property and the
other is contractors who actually construct these properties. The six types of contract are Lump
sum contract, item/unit price contract, scheduled contract, cost plus fixed fee contract, special
contract, cost plus percentage contract (Chiang, Nouri and Samanta, 2014). These all are
depended upon the working environment of companies and makes them capable to handle any
kind of owner. They work in difficulties like foundation condition, construction of expensive
structure etc. In both companies these types of contract an important role for better handling of
customer and help them to improve their profitability and productivity.
Cost revenues: It is measured at the consideration received and is affected by the number
of uncertainties that depends on the result of upcoming events. It is observed that the estimate
often needs to be revised as events occur which have to be resolved, so the amount of contract
revenue may increase or decrease from depends upon the period to the upcoming time. For
instance, the amount of income agreed according to the fixed price contract may increase as a
outcome of cost escalation clauses or when a constant price involves per unit of output, contract
revenue increase as the total number of unites keeps on increasing. Contract revenue comprise a
variation, claim and incentive payments. A variation is said to be an instruction given by the
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customer for a change in scope of the work performed by under the agreements between the
parties (Danthine and Donaldson, 2014). Claims are described to be the amount that a contractor
seeks to bather from a customer or the party as reimbursement for cost that was included in the
contract price. Similarly contract revenue are said to be an additional amount of money that is
payable to the declarer if nominative execution standard are met or exceeded. In both companies,
GDB Holding Bhd and Fajarbaru Builder Group Bhd have importance of contract revenue as this
amount helps in maintaining profit in company and help them to increase their productivity.
Contract cost: according to construction contract the contract cost comprise that total cost
that relate directly to the certain contract, those price that are attributed to the activity which can
bed allocated within a contract. It also include other cost as are specifically indictable to the
buyer that is covered under the terms of agreements. In companies costs which are related to
specific contract includes, labour cost like site supervision, cost of overall material used in
modifying property, depreciation of plant and building written in agreements, total cost of
moving plant, equipment and material to and from the contract site, hiring plant and instruments,
cost involved on design and technical assistance which is part of the contract done with owner, it
included claims from the third parties and the estimation cost of rectification and work which
further includes expected warranty costs. Contract cost are attributed also to the contract activity
in general that can be allocated to the specific agreements that includes, insurance, construction
overheads and the cost of design of technical material and instrument which is directly related to
certain contract. Similarly some contact cost cannot be attributed to specific agreements or
cannot be allocated to a contract that can be leave out such as, general administrative cost that
cannot be reimbursement, total selling cost, cost related top research and development for which
compensation cannot be provided and the depreciation of the plants and instruments those are
bought for completing work but are not used in a particular contract (De Waegenaere, Sansing
and Wielhouwer, 2015).
Percentage of completion: when companies recognition of income and expenditure by
mention to the stage of the completion of a agreement is often referred to the percentage of
completion method. According to this method contract revenue are matched to the contract cost
by the contractor that was incurred by him in reaching the completion stage of a project. It result
in the reporting of revenue, expenditure and total profit that could be attributed depended upon
the total work completed. The main importance of this method is to give necessary information
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on the extent of agreement and performance during a period. This method of percentage of
completion the revenues are recognised as total income in the profit and loss statement during an
accounting year according to the work completed. Where as contract cost are recorded as an
expenses on income statements for financial year that is related to which they relates is
performed.
3. Disclosure and presentation of both companies.
According to compliance of Malaysian accounting standard board 111 a contractor has
reached the end of its first year of operation in which all cost are incurred have been paid in the
cash and all their increments billings and advances have been collected in cash payments. It it
was concluded by the companies that material uncertainly exists, then manager are required to
give attention in their reports to the related disclosure in the financial statements of the both
companies. It is observed that if such disclosure are inadequate that cannot be modifies then
conclusion must relay on the audit evidence obtained up to the date to modify, opinion o9f
auditor of companies that will be benefited for contractor of companies develop a cease to
continue a going concern (Macve, 2015). Contractor of companies GDB Holding Bhd and
Fajarbaru Builder Group Bhd included contract expenses that are included by them on certain
specific contract, such as cost of material that have been purchased by them, for the contract
which have been not used in the agreement performance at the time of reporting. For example in
GDB Holding Bhd the contact A, B, C, D, E are some contract, but contract cost on B, C and E
includes the cost that was spend by contractor to carry operation but not utilize by them and the
status is shown in the image mentioned below.
5

In Fajarbaru Builder Group Bhd, contractor have taken five project in their disclosure that
were taken by them during an agreement with the owner. But at the same time some it was
observed that some of the construction contract C, E the cost on contract includes the cost of
material that have been bought for the contract that have been used in agreements as at the time
of formation of reports.
The report shows the status of five project for company:
Contract
(amount in Rs. lakhs)
A B C D E Total
Contract Revenue recognised in 185 320 270 311 650 2006
accordance with paragraph.
Contract Expenses recognised in 320 750 380 550 52 1,125
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accordance with paragraph.
Expected Losses recognised in nil nil nil 70 20 90
accordance with paragraph 35.
Recognised profits less 85 68 40 (80) (20) 15
recognised losses
Contract Costs incurred in the 122 310 510 150 108 1200
period
Contract Costs incurred recognised
as contract expenses in the period
in accordance with paragraph. 220 350 530 420 555 2075
Contract Costs that relate to future
activity recognised as an asset in
accordance with paragraph. 46 nil 90 130 nil 85 351
Contract Revenue (see above). 115 220 480 220 53 1090
Progress Billings (paragraph 40). 100 520 380 180 55 1,235
Unbilled Contract Revenue. 35 nil nil 20 nil 55
Advances (paragraph 40). nil 70 50 nil 25 120
4 Comparison of disclosure of both companies.
In case of comparison between the disclosure of two companies that different disclosure
requirement have to be followed by the contractor of two companies. This is because the
information for the notes section in their financial statements are use to be collected individually
once the balance sheet, income statements and other financial documents are prepared. The data
collected have to be summarised in a different list instead of being incorporated in the single
detailed programs (Stice, and Stice, 2013). The following are the criteria for comparisons
between the two companies that are kept in notes by the contractor:
 The accounting policies and the contract cost formula that have to be used in inventory
valuation.
 Carrying total amount and the actual down break that may impact the values of contract
revenues by appropriate classification such as production supplies, work in progress etc.
 The amount of actual contract cost and contract revenue that is recognised during an
accounting year (Sargent, 2013).
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 The total amount that is to be estimated by implementing the percentage of completion
formula, so that circumstances or event that led to the reversal of revenue and cost within
the construction cost.
On the basis of analysis about two companies the comparison can be done by making
sure that standard of construction contract are followed and compliance of MFRS 111 are
implemented on their report. The live status of both companies shoes that some of the project are
just brought by constructor that are not utilised in the agreements. When Fajarbaru Builder
Group Bhd, focused on 5 project in an agreement with party but after the implemented of
percentage of completion formula the contractor figure out the contract cost incurred on these C,
E are not utilize by completing a project. Similarly from the analysis of five project of GBD
Holding Behrad, the contract cost involved of these agreement project the ascertain that cost
incurred on B, C, D are being paid extra that are not part of project any more and cost have to be
re coved within the two utilize project.
CONCLUSION
From the above report it has been concluded that, construction contract are said to be a
mutually agreed documents between the owner of property and the contractor who is responsible
to modifies that property. Different types of construction contract such as lump sum, cost plus,
time and material contract etc. support contractor and owner to be bounded within a relationship.
The report shows the disclosure of both companies under the MFRS 111 that makes a ground for
comparison so that proper productivity and profitability.
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REFERENCES
Books and Journals:
Arnold, P. J., 2012. The political economy of financial harmonization: The East Asian financial
crisis and the rise of international accounting standards. Accounting, Organizations and
Society, 37(6). pp.361-381.
Banerjee, B., 2012. Financial policy and management accounting. PHI Learning Pvt. Ltd..
Chiang, B., Nouri, H. and Samanta, S., 2014. The effects of different teaching approaches in
introductory financial accounting. Accounting Education, 23(1). pp.42-53.
Danthine, J. P. and Donaldson, J. B., 2014. Intermediate financial theory. academic press.
De Waegenaere, A., Sansing, R. and Wielhouwer, J. L., 2015. Financial accounting effects of tax
aggressiveness: Contracting and measurement. Contemporary Accounting Research,
32(1). pp.223-242.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Sargent, C.S., 2013. Find it, fix it, and thrive: The impact of insisting on proficiency in
prerequisite knowledge in intermediate accounting. Issues in Accounting Education,
28(3). pp.581-597.
Stice, E. K. and Stice, J. D., 2013. Intermediate accounting. Cengage Learning.
Online
Fajarbaru Builder Group Bhd. 2017. [Online] Available Through:
<https://www.reuters.com/finance/stocks/financial-highlights/FAJA.KL>.
GBD Holding Behrad. 2017. [Online] Available Through:
<https://quotes.wsj.com/MY/GDB/financials>