Setting the scene up
Let's tie this blog post to the earlier one and try to describe our very general "terms of reference", thus setting up a scene for our future work, in terms of What, Where and When. Incidentally, these three words in this very sequence happen to be the name of a popular somewhat highbrow TV show started in USSR and continuing today on the Russian TV, albeit with more glitter, then you expect from a quiz game. Our task at hand is perhaps less glitzy, nonetheless important for our future system-in-making.
What
So, we have an imaginary company, unimaginatively named 3W, who ask us to help them with automating a construction contract accounting. 3W needs to build production facility, thus we will be using - IFRS 15 - Revenue from Contracts with Customers for our terminology and IFRS in general for our accounting policy. The details of the construction project are not important to us, and so we will rely on relevant accounting standards when we need details now and then. But some of the detail may be useful for subsequent phases of the development of our system and so we describe them here.
The construction period: let's agree on one that spans across at least two standard reporting periods of 1 year. This means that we will need to account for the unfinished construction at the end of the first year, and so we can introduce accounting policies for allocation of costs of a construction contract for the accounting period and recognition of expenses. To simplify our problem, let's assume that this contract is a turnkey one, as this would allow to simplify the policy implementation in our system, before we start complicating it to recognize other types of contracts.
We have this construction contract awarded to a construction company. The contract is divided into stages with relevant milestones, at the end of each stage the contractor issues an invoice.
To introduce some complication, assume the customer, 3W, receives a loan for the construction from a bank. According to the terms of the loan 3W sends the contractor invoices to the bank, which then makes payment to the contractor.
You can imagine that there are many things that can go wrong without a proper monitoring of the invoices received, sent and paid. 3W wants to efficiently control the documents related to this construction, also accounting for possible time lag between receipt of invoices, sending them to the bank and the receipt of funds by the contractor.
Where
The Where - the location - is important for our purposes only because it can introduce local GAAP and other rules based on the location. We assume that the location is using IFRS which should hopefully standardize our accounting system. Of course, we should try to make the accounting system versatile enough to be able to add some additional features to reflect the GAAP of another location.
When
All of this has happened in the very recent past, and the current IFRS are applicable to our scenario at the time of writing of this blog. The IFRS are constantly evolving, we will try to reflect the current standards to keep our system current.
So here we are, and the scene for our work set up. Let us begin.
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