Work in progress for own account and risk
Work in progress is part of the stocks (Article 2: 369 of the Dutch Civil Code), whereby the economic risk lies with the entrepreneur. These works in progress are the legal entity’s property because they have not yet been sold. This work in progress is valued at manufacturing cost or a lower net realizable value.
The manufacturing price includes:
- Direct material consumption
- Direct labor and machine costs
- Other costs are directly allocated to manufacturing
Sometimes also with storage for indirect manufacturing costs. The net realizable value is based on an expected sale price, fewer costs to be incurred for completion and sale.
Projects in progress commissioned by third parties
When we talk about contracted projects with a third party to construct an asset (or a combination of assets) – where execution usually extends over more than one reporting period – we talk about work in progress. Because the start date of the project and the date on which the project is completed often do not fall in the same reporting year, the allocation of the result per calendar year is an essential factor in determining the projects in progress. It is necessary to correctly allocate project costs and revenues to both the duration of the project and the degree to which the project has been realized.
Projects in progress are subdivided into (DAS B5.303):
- Contracting contracts: execution takes place at a fixed price, often supplemented with additional or less work.
- Cost-effectiveness contracts: the execution is based on reimbursement of all costs related to the project, increased by a surcharge or a profit percentage.
Processing project costs and revenues
With a contract (RJK B5.309), the following conditions must be met:
- You can reliably determine the total project revenues.
- The project’s economic benefits in progress will probably flow to the legal entity.
- You can determine the project costs required to complete the project in progress and the extent to which the project has been completed on the balance sheet date reliably.
- The costs to be allocated to the project are distinguishable and can be determined reliably. It can compare the actual expenses incurred with the preliminary calculation or earlier estimates.
In the case of a coordinated contract, you must meet the requirement:
The project’s economic benefits in progress will probably flow to the legal entity.
Whether based on a contract, the costs attributable to the project are distinguishable and can be reliably determined.
Small legal entities can choose from these two valuation methods for the processing of project costs and revenues (DAS B5.308):
- Profit-taking in proportion to the performance performed
- Profit-taking upon delivery/completion of the project
With pro-rata profit-taking, it is essential that project progress can be reliably determined. If that is the case, the profit can be allocated to the financial year to the extent that the performances performed during the financial year accounted for their share of the total performances performed for the project. This concept of profit is in line with the concept of profit for tax purposes, which means that no passive or active deferred income must be determined and presented in the annual accounts.
There are situations where profit cannot be measured responsibly. In those cases, you must fully recognize the profit in the financial year the project is delivered or completed (DAS B5.308).
Presentation in the annual accounts
The project in progress item consists of the balance of the realized project costs, increased by the allocated profit and less the installments already declared and any recognized losses. This balance (kept per project) can be a debit or a credit balance on the balance sheet date. This item is included separately under current assets (between inventories and receivables/deferred income) if it concerns a debit balance. In the case of a credit balance, the item is included under current liabilities. It is also permitted to process the balance of the projects in progress as one total and present it on the balance sheet. The realized project revenues are shown as net sales in the income statement.
Change in work in progress if the project is not yet completed
If the latter method is used, the total project revenues should be presented as net sales in the year of completion of the project in progress. In addition, the cumulative project revenues up to and including the previous periods must be presented as changes in work in progress.
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