ACCOUNTING STANDARD

FOR

CONSTRUCTION INDUSTRY

Accounting Standard for Construction Industry

CONTENTS

I.	General Provisions

§1.	Purpose

§2.	Scope of Application

§3.	Definitions

II.	Construction Income

§4.	Recognition of Construction Income

§5.	Percentage of Completion

§6.	Construction Revenue

§7.	Construction Costs

III.	Special Provisions for Calculation of Construction Income

§8.	Accounting for Joint Construction

§9.	Provision for Loss on Construction

§10.	Provision for Repairs after Completion of Construction

§11.	Depreciation of Construction Equipment

§12.	Valuation of Temporary Construction Materials

§13.	Elimination of Effects of Transactions Between Construction Units

IV.	Preparation of Financial Statements and Note Disclosures

§14.	Balance Sheet

§15.	Income Statement

§16.	Schedule of Construction Cost

§17.	Notes to Financial Statements

§18.	Other Implementation Details

Addenda

Enacted on April 1, 1998

Amended on Dec. 22, 1999

CHAPTER I

GENERAL PROVISIONS

§1. Purpose

The purpose of this Standard is, in accordance with Article 90 of the Financial Accounting Standards for Business Enterprises (hereinafter referred to as the "FAS"), to prescribe the accounting treatment and reporting requirements for firms operating in the construction industry. This Standard provides guidance on the matters for which there are no relevant provisions in the FAS or which need different accounting treatment because of the industrial peculiarities of the construction business.

§2. Scope of Application

This Standard should be applied to construction contracts which fall under one of the following. However, this Standard should not be applied to the supplying of particular products to unspecified customers.

1.	Construction work performed under an agreement with a customer; or

2.	Construction work related to subscription sales.

§3. Definitions

The following terms are used in this Standard with the meanings specified:

1.	The construction contract refers to a contract in which the contractor performs construction work and the customer pays for the output, regardless of the names of contracts.

2.	The contract price refers to the total amount of a construction contract, realized or realizable as of the balance sheet date under the terms of the contract.

3.	The estimated construction cost refers to the total construction cost, including the costs incurred as of the balance sheet date and those expected to be incurred to complete the construction.

4.	The percentage-of-completion method refers to the method that recognizes revenue by multiplying the contract price by the percentage of completion and recognizes actual construction costs incurred as expense to be matched against revenue.

5.	The completed-contract method refers to the method under which the contract price is recognized as revenue when the construction is completed, and the total construction costs incurred are recognized as expenses at that time.

6.	The construction cost prior to the contract refers to the construction cost incurred for a specific contract before the contract is entered into (including depreciation and maintenance expenses for tangible assets acquired for use in the construction);

7.	The subcontract refers to a contract between the original contractor and a third contractor for all or part of the construction;

8.	The construction unit refers to a component of a single construction contract, which is treated as a separate contract for the purpose of recognizing construction profit.

9.	The temporary construction materials refers to materials that are temporarily built or used during construction and are removed after construction is completed.

CHAPTER II

CONSTRUCTION INCOME

§4. Recognition of Construction Income

(1) Revenues on construction contracts and subscription sales should be recognized by use of the percentage-of-completion method.

(2) The percentage-of-completion method should be applied only when all the following conditions are satisfied:

1.	The contract price, percentage of completion and estimated construction cost can be estimated reliably;

2.	The contract clearly specifies the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement; and

3.	Both contracting parties can be expected to perform all their obligations under the contract.

(3) The percentage-of-completion method should not be used when future income or loss is uncertain due to unusual or extraordinary events such as a disaster or a war.

(4) In case the percentage-of-completion method is not applicable pursuant to paragraphs (2) and (3), the recoverable amount, within the limit of the actual cost incurred, should be recognized as revenue, and the total amount of the actual cost should be recognized as expense in the current period.

§5. Percentage of Completion

(1) The percentage of completion is measured by the ratio of the actual construction cost incurred to the estimated construction cost. The estimated construction cost should be determined, on a consistent basis, using systematic and reasonable procedures, and should reflect new information obtained during construction. Any expected costs for repairing defects should be also included in the estimated construction cost.

(2) Notwithstanding paragraph (1), in the case that construction revenue is earned in proportion to work hours, work days, materials input or area of completed construction, and the proportion of the actual input or completed construction as compared to the total input needed or entire completion can be measured objectively, that ratio can be used as the percentage of completion.

(3) A construction is deemed completed when the contractor has performed its basic obligations under the contract and the object of construction work has been completed. However, if additional construction costs or repair costs are estimated reasonably and a provision for them is established, the construction is regarded as completed when the object of construction work becomes ready for use.

§6. Construction Revenue

(1) Measurement of construction revenue should be based on the total amount of the contract price. However, if the contractor serves simply as a contract supervisor and receives a commission or fee for that service, the construction revenue should be only the amount to be earned by the contractor.

(2) In the case that the contract price has been subject to a change as a result of a revision of contract terms, basic design or contract specifications or an exercise of an option, it should be adjusted accordingly.

(3) The adjustment pursuant to paragraph (2) should be reflected in the construction revenue in the fiscal year in which the related events have occurred and in subsequent years as well.

§7. Construction Costs

(1) In applying the percentage-of-completion method, the construction cost for the current period should be calculated as follows:

total construction costs incurred

+ accrual of provision for loss on construction

(-) (restoration of provision for loss on construction)

- transfer to other accounts

--------------------------------------------

construction cost for the period

In applying the completed-contract method, the construction cost for the current period should be calculated as follows:

total construction costs incurred

+ accrual of provision for loss on construction

(-) (restoration of provision for loss on construction)

+ unfinished work at the beginning of the year

- unfinished work at the end of the year

- transfer to other accounts

--------------------------------------------

construction cost for the period

(2) The total construction costs incurred include material costs, labor costs, outside manufacturers' costs and overheads, which are directly and indirectly related to the construction. However, in the year of the completion of construction, the total construction costs incurred should include estimated repair costs provided in Article 10 paragraph (1).

(3) Overheads should be allocated on the basis of direct construction costs, direct labor costs, direct work hours, or some other reasonable allocation methods.

(4) In the case of a construction performed under a subcontract, the construction costs arising under the subcontract should be included, as outside manufacturers' costs, in the construction cost for the period. As for the costs incurred directly by the contractor in relation to the subcontract, they should be classified as materials, labor costs or overhead, depending on their nature.

(5) Any expenditure incurred in relation to bidding and other similar costs for sales activities (hereinafter referred to as the "receiving-order cost") should not be included in the construction cost but should be recognized as a selling expense. However, in case the following conditions are met, the receiving-order cost may be treated as an investment asset (deferred receiving-order cost) to be amortized in proportion to the amount of construction revenue:

1.	The construction contract has been signed;

2.	The receiving-order cost is directly related to the contract; and

3.	Its magnitude exceeds 3/100 of the contract price.

(6) Selling and administrative expenses should not be included in the construction cost but should be recognized as operating expenses as they occur.

(7) Surplus construction materials (remaining materials) should be valued by applying Article 66 of FAS, and any loss on valuation should be recognized as a non-operating expense.

(8) The construction cost prior to the contract may be recorded temporarily as a prepaid construction cost and later transferred to construction cost if an agreement to construction is probable.

CHAPTER III.

SPECIAL PROVISIONS FOR CALCULATION OF CONSTRUCTION INCOME

§8. Accounting for Joint Construction

(1) In case that a joint company is established by two or more independent companies so that they can secure and perform a construction contract jointly (hereinafter referred to as "joint construction"), accounting requirements for each investment company are as follows.

1.	Investment in the joint company should be recorded as an investment asset and accounted for by use of the equity method, regardless of the company's percentage of interests in the joint company, pursuant to Article 59 paragraph (3) of FAS.

2.	When the investment is made using a physical asset, it should be measured at the fair value of the physical asset. If some consideration is received in exchange for the physical asset, the amount of the investment should be the asset's fair value less the amount of the consideration received.

3.	In case raw materials, supplies or services are supplied by an investment company to the joint company or a lease agreement regarding construction equipment is made between them, the transaction should be accounted for as if it is an arm's length transaction between independent companies.

(2) If, without establishing a joint company, the participating companies perform a construction contract together under an agreement to do so, accounting requirements for each company are as follows.

1.	When they purchase an asset or incur a liability jointly to perform the joint construction, each participating company should record the asset or liability on the basis of its percentage of participating interests.

2.	Each participating company should recognize construction revenue and cost on the basis of its percentage of participating interests. However, construction costs directly attributable to each participating company should be recognized separately, and common costs for the joint construction (hereinafter referred to as "common cost") should be allocated to each company on the basis of its percentage of participating interests.

3.	Advances from the customer should be allocated to each participating company on the basis of its percentage of participating interests.

4.	If raw materials and supplies are supplied to the joint construction and their book values differ from their fair values, the differences should not be recognized as income or loss. Instead, they should be added to or deducted from the construction cost allocated on the basis of each company's percentage of participating interests. In this case, the differences related to tangible assets such as construction equipment should be adjusted appropriately based on their useful lives.

5.	Rental fees, received from lending tangible assets such as construction equipment to the joint construction, should be offset against depreciation expense for the period during which the asset has been used, and the remaining difference should be added to or deducted from the construction cost allocated to each participating company.

(3) For the joint construction, the following should be disclosed in notes to the financial statements:

1.	The name of the joint construction, each company's percentage of participating interests, and other major terms of the construction contract;

2.	Descriptions of major transactions with the joint construction during the period;

3.	Descriptions of liabilities and contingencies that have taken place from the joint construction contract; and

4.	In case that a joint company has been established, major items of assets, liabilities, revenues and expenses as well as the respective amounts corresponding to each investment company's percentage of interests in the joint company .

(4) In applying paragraphs (1) to (3), if the form of a construction is a joint construction, but in substance, it is performed by a single company, it should not be accounted for as a joint construction. Even when a joint company has been established, mechanical application of the above provisions is not allowed and the construction should be accounted for in accordance with its economic substance.

§9. Provision for Loss on Construction

(1) When a loss on construction is expected, the expected loss should be recognized as an expense by establishing a provision for loss on construction.

(2) The provision for loss on construction established pursuant to paragraph (1) should be presented as a deduction from the construction cost when construction losses occur in the remaining construction period.

§10. Provision for Repairs after Completion of Construction

(1) When repair work for defects is expected, an amount corresponding to a certain percentage of the contract price should be included in the construction cost for the period in which the construction is completed and the same amount should be recorded as a provision for repairs.

(2) The provision for repairs established pursuant to paragraph (1) should be written off against repair costs incurred in subsequent periods. Any remaining balance of the provision should be restored in the period in which the contractual obligation for repair work is terminated. If the provision is not sufficient to absorb actual repair costs, the amount in excess of the provision should be recognized as an expense in the period.

§11. Depreciation of Construction Equipment

Depreciation for construction equipment should be calculated by use of one of the following methods:

1.	When the equipment can be used only for a specific construction contract, the depreciation should be calculated over the construction period or its economic useful life, whichever is shorter. The depreciation should be included in the construction cost;

2.	When the equipment is used for several construction contracts, the depreciation should be calculated based on its economic useful life and allocated to each construction contract.

§12. Valuation of Temporary Construction Materials

When temporary construction materials withdrawn from a construction contract, such as steel materials or similar durables, have long useful lives and can be used for other construction projects, they should be accounted for in the same manner as for tangible assets. Otherwise, they should be recorded, after estimating their value, as an inventory.

§13. Elimination of Effects of Transactions Between Construction Units

In the case that revenue and costs of construction are calculated by construction unit, the effects of transactions between construction units or between the head office and construction units should all be eliminated when financial statements are prepared.

CHAPTER IV.

PREPARATION OF FINANCIAL STATEMENTS AND NOTE DISCLOSURES

§14. Balance Sheet

(1) Assets and liabilities which are directly related to the construction business should be presented separately from other assets and liabilities.

(2) The account classifications of assets and liabilities related directly to the construction business are as shown in the annexed From 1.

§15. Income Statement

(1) Construction revenues and construction costs should be presented separately in the income statement.

(2) The account classifications of construction revenues and construction costs are as shown in the annexed Form 2.

§16. Schedule of Construction Cost

(1) Construction companies should prepare a schedule of the cost of construction (including a schedule of the cost of unfinished work) in addition to those provided in Article 88 of FAS.

(2) The account classifications to be used in the schedule of the cost of construction are as shown in the annexed Form 3.

§17. Notes to Financial Statements

Construction companies should disclose the following in notes to the financial statements.

1.	Descriptions of major construction contracts

2.	Significant accounting policies

a. The methods used to determine the construction revenue and expenses recognized in the period;

b. The methods used to translate the foreign currency financial statements of overseas business sites;

c. In the case of the percentage-of-completion used, the methods used to calculate the percentage-of-completion; and

d. Descriptions of and valuation methods for unfinished works and other inventories which are not included in the construction cost.

3.	Outstanding balance of construction contract amounts

The Outstanding balance of contract amounts should be presented together with the beginning balance of contract amounts, new contract amounts during the period and the amounts recognized as revenue during the period.

4.	Other important details related to construction contracts

a. Descriptions of major construction contracts

aa. The contract price and its changes by contract;

bb. The accumulated amount of construction revenue to date and current revenue recognized by use of the percentage-of-completion method;

cc. The accumulated amount of billings and the amount billed during the period; and

dd. The accumulated amount collected from customers and the amount not collected;

b. Descriptions of contingencies which may affect profits, such as claims, changes in specifications or design, etc.;

c. In the case of receivables to be collected over a long period under special agreements, the schedule and method of collection and the amount of accrued interests; and

d. Descriptions of deposits made or payment guarantees related to construction contracts

5.	Subparagraphs 1 to 4 of Article 17 should be also applied to subscription sales.

§18. Other Implementation Details

Other details necessary in implementing this Standard may be separately provided by the Chairman of the SFC.

Addenda

(April 1, 1998)

§1. Effective Date

This Standard shall be effective on April 1, 1998.

§2. Interim Measures Regarding Repealing of Previous Standard

As for the accounting treatment made prior to the effective date of this Standard pursuant to the Accounting Standard for Construction Industry formulated by the Securities and Exchange Commission (hereinafter referred to as "the previous Standard"), it is regarded as made pursuant to this Standard.

§3. Relation to Other Standards

When reference to the previous Standard is made in any other accounting standards as of the effective date of this Standard, that reference is regarded as the reference to this Standard.

Addenda

(December 22, 1999)

§1. Effective Date

This Standard shall be effective on December 22, 1999.

§2. Interim Measures

(1) The revised provision of Article 8 shall be applied to new joint construction contracts after the effective date of this Standard. However, it may be applied in the fiscal year to which the effective date of this Standard belongs.

(2) The accumulated effect of accounting changes arising from application of the proviso of paragraph (1) above should be added to or deducted from the beginning balance of retained earnings.