Combining and segmenting construction contracts

Whether two or more contracts with the same customer are combined into a single unit of account (with a single blended progress measure) or kept separate materially changes the timing and pattern of revenue recognition across the contracts, since profitable and loss-making elements within a combined contract offset each other in ways that separate accounting would not permit, getting this wrong can either mask an onerous element or artificially smooth margin across genuinely distinct scopes of work.

Were two or more contracts with the same customer, or related parties of that customer, entered into at or near the same time as part of a single negotiated package with one commercial objective? Does the consideration payable under one contract depend on the price or performance of the other contract? Are the goods or services promised across the contracts, viewed together, really a single performance obligation rather than genuinely separate scopes? Are there distinct lots or phases within a single contract document that carry separate pricing and acceptance and should instead be segmented?

1. Identify contracts entered into at or near the same time with the same customer (or related parties of that customer) as candidates for the combination assessment.
2. Apply the three combination criteria: the contracts were negotiated as a package with a single commercial objective; the amount of consideration in one contract depends on the price or performance of the other; or the goods or services promised are, or together form, a single performance obligation.
3. If any one criterion is met, combine the contracts and apply the five-step model (including a single measure of progress, if there is a single performance obligation) to the combined arrangement.
4. Where a single legal contract contains distinct, unrelated deliverables that do not depend on each other and were not negotiated as a package, consider whether segmentation into separate accounting units is more representative, though this is less common than combination in practice.
5. Reassess the combination/segmentation conclusion whenever contracts are amended, since a subsequent side letter or variation can retroactively link previously separate contracts.

For combined contracts treated as containing a single performance obligation, use a single measure of progress (e.g. a blended cost-to-cost calculation across the combined scope) applied consistently to the combined transaction price; for combined contracts that still contain multiple distinct performance obligations, allocate the combined transaction price across them based on relative standalone selling prices even though the contracts are combined for the combination assessment itself. Reassess whenever contract terms change whether the combination or segmentation conclusion, and therefore the unit of measurement, remains appropriate.

Disclose: (1) the accounting policy and significant judgments applied in assessing contract combination, particularly for contracts with the same or related customers signed close in time; (2) the effect of combination on the timing and amount of revenue recognized where material; (3) disaggregation of revenue that reflects the combined or separate contract units as actually accounted for.

• Keeping contracts signed within days of each other, for the same interlinked infrastructure package and negotiated as one commercial deal, accounted for separately purely because they are documented as separate legal contracts
• combining contracts with the same customer that were genuinely negotiated independently and have no interdependency in price or performance, purely because of proximity in signing date
• failing to reassess combination when a variation to one contract embeds pricing that depends on the other
• applying a single blended progress measure to combined contracts that actually contain multiple genuinely distinct performance obligations requiring separate allocation.