Improving the accounting of revenue and costs of construction contracts at hhk viet nam llc

The production process and construction products of construction enterprises differ from other material production industries, affecting the accounting of revenues and costs of construct

THEORETICAL FRAMEWORK ON ACCOUNTING FOR

CHARACTERISTICS OF CONSTRUCTION ACTIVITIES AND BASIC

1.1.1 Characteristics of Business Operations in Construction Enterprises

Construction is fundamentally an important industrial material production sector aimed at creating technical material bases for the national economy The production process and construction products of construction enterprises differ from other material production industries, affecting the accounting of revenues and costs of construction contracts within these enterprises, as demonstrated:

Firstly, construction products are unique, individual, large-scale, and complex, typically undertaken based on technical designs and separate cost estimates for each product This requires the preparation of estimates for design and construction before production begins, and during execution, it is necessary to compare with estimates to ensure performance and quality of the work Revenue from construction products is usually determined before production begins

However, construction costs are often not uniform, and the commodity nature is not as clear as other industrial products The consumption of construction products usually occurs through acceptance and handover of the work, and the recognition of revenue and costs must be based on drawings, construction designs, and project pricing

Therefore, the management and accounting of revenue as well as costs must be based on design estimates and construction estimates, as they significantly affect the costs of each project Accountants need to compile costs, calculate costs, and account for revenue and expenses for each separate construction project, each component of the construction contract This ensures the appropriate principle in recognizing revenue and costs

Secondly, the construction time of projects often extends due to the large and complex nature of construction products, requiring a long period to complete before they can be put to use Thus, cost determination is often based on the completion or handover of the project, dependent on agreed payment stages and the financial ability of the executing party This creates a complex and challenging process in assembling documents related to revenue and costs

Due to this characteristic, the accounting of revenue and costs of construction contracts needs to consider time factors and appropriate payment methods This complexity also makes it difficult to determine the timing and value of revenue recognition for accounting business results of construction enterprises compared to regular manufacturing enterprises

Thirdly, the production location in the construction industry is unstable Each project is carried out at a separate location, and after completion, both manpower and technological equipment must move to the next project This leads to disruptions in the production process, causing instability in the organization Therefore, during construction, necessary costs such as labor movement, machinery, temporary housing construction, and site preparation often arise

Due to this characteristic, enterprise accounting must be accurate in identifying, reflecting, and compiling costs related to construction contracts, and must allocate them reasonably

Fourthly, organizing the construction production process is a significant challenge During construction, each project may involve many units participating in one or more parts of the project, following a specific sequence in time and space on the construction site At the same time, construction enterprises today often apply various contracting mechanisms, such as lump sum costing or itemized cost contracting

This requires construction enterprises to coordinate smoothly, inspect, and monitor the construction process to ensure progress and quality of work The organization of accounting for revenue and costs of construction contracts must also

10 be conducted scientifically, to provide honest, timely, and complete information about the production activities of construction enterprises

Fifthly, construction activities often take place outdoors and are therefore greatly affected by weather and natural conditions, including climate and the surrounding environment This can lead to disruptions in the construction process and affect the work efficiency of enterprises, causing issues such as substandard product quality, material and equipment losses, and impacts on worker health

This feature also affects the accounting process of revenue and costs of construction contracts For example, disruptions in the construction process can affect the timing of payments and revenue recognition Losses due to objective factors such as storms and flooding also make compiling costs difficult and inaccurate

It can be seen that the construction industry has distinct characteristics, different from other production and business industries Therefore, the management and organization of cost accounting as well as revenue from construction activities need to be conducted scientifically This helps ensure the information provided is honest and objective, accurately reflecting the operating conditions of enterprises in the construction industry

1.1.2 Construction contracts and their classification in construction enterprises

According to Vietnamese Accounting Standard No 15, a construction contract is defined as follows: “A construction contract is a written agreement concerning the construction of an asset or a combination of closely related or interdependent assets in terms of design, technology, function, or their basic use purposes.”

Based on this definition, a construction contract can be agreed upon to construct a single asset, such as a power plant, a pedestrian tunnel, a stadium, a road, or to construct a combination of closely related or interdependent assets in terms of design, technology, function, or basic purposes of use, such as an oil refinery, a complex of textile factories

Service contracts directly related to the construction of an asset include consulting, design, survey contracts, project management, and architectural services, Contracts for the restoration or demolition of assets and environmental restoration after the demolition of assets

A construction contract involving the construction of several assets considers the construction of each asset as a separate construction contract when all three of the following conditions are simultaneously satisfied:

- Each asset has a separately determined design and estimate, and each can operate independently

- Each asset can be negotiated separately with each contractor, and the customer may accept or reject the contract portion related to each asset

- The costs and revenues of each asset can be determined

A group of contracts signed with one client, or a group of clients is considered a single construction contract when all three of the following conditions are met:

- These contracts are negotiated as a single package deal

- The contracts are very closely related to each other to the extent that they are practically several parts of a project with a similar estimated gross profit

- The contracts are executed simultaneously or in a continuous process

CONTENT AND METHOD OF RECOGNIZING REVENUE AND COSTS OF

1.2.1 Revenue Content of Construction Contracts

The determination of revenue in construction contracts according to Vietnamese Accounting Standards (VAS 15) requires accurate and cautious calculation Revenue from construction contracts is calculated based on the fair value of the amounts received or expected to be received from executing the contract, including:

- Initial revenue recorded in the contract (which is the initial estimate of the contract as specified in the signed construction contract), and

- Increases and decreases during the execution of the contract, customary payments, and other payments if these have the potential to change the revenue and can be reliably measured

The determination of revenue from construction contracts is influenced by many uncertainties, dependent on future events Therefore, initial revenue estimates often need adjustments over time to accurately reflect changes in the project These adjustments can cause the revenue of the contract to vary in different periods

Changes in the revenue of construction contracts in each period include:

- The contractor and client may agree on changes and requirements such as: technical design changes, scope of work changes under the contract which increase or decrease the revenue of the subsequent contract compared to the initially accepted contract

- Revenue agreed in the contract with a fixed price may increase due to reasons like price increases

- Revenue under the contract may decrease due to the contractor not meeting the construction schedule or failing to ensure the quality of the work as agreed in the contract

- When a fixed-price contract specifies a fixed price per unit of completed product, the revenue under the contract will increase or decrease as the quantity of the product increases or decreases

1.2.2 Cost Content of Construction Contracts

The costs of a construction contract in construction enterprises encompass all expenses related to labor, materialized labor, and other necessary costs that arise during the production and execution process

Determining the costs of a CC is a crucial factor that influences the outcome of the operational activities of construction enterprises Therefore, correctly and fully identifying the costs of a CC is extremely important and necessary within a construction enterprise

According to VAS 15, the costs of a construction contract include:

Costs directly related to each contract such as:

- Labor costs at the site, including wages and salaries of workers directly involved in the construction and related payroll deductions

- Supervision costs, which are the total amounts directly related to supervisory staff who represent the enterprise in managing the construction as per the enterprise’s requirements

- Costs of raw materials and equipment for the construction

- Depreciation costs of machinery, equipment, and other fixed assets used to execute the contract

- Transportation, installation, and dismantling costs of machinery, equipment, and materials to and from the construction site

- Rental costs for workshops, machinery, and equipment to carry out the contract

- Estimated costs for repairs, warranties of the construction, and other directly related costs

General costs related to the operation of construction contracts that can be allocated to each contract include insurance expenses, design costs, and technical assistance not directly related to a specific contract, general management costs in construction, and borrowing costs

These costs are systematically allocated using appropriate methods according to a suitable ratio and are uniformly applied to all costs with similar characteristics The allocation should be based on the usual level of construction activity

Other costs that can be recovered by the client according to the terms of the contract include expenses such as land clearance costs, deployment costs, etc., which the client must reimburse the contractor as stipulated in the contract, and vice versa

Costs that are not related to the operations of the contract or cannot be allocated to the construction contract are not included in the costs of the construction contract, such as:

- General administrative expenses, or research and development costs that the contract does not stipulate the client must pay to the contractor

- Depreciation of machinery, equipment, and other fixed assets not used for the construction contract

Construction contract costs encompass all expenses from the start to the completion of the project, from materials and labor to machinery and project management costs Strict management of these expenses not only helps better control but also ensures accuracy in accounting for revenue and costs, forming the basis to enhance the financial effectiveness and success of the project

1.2.3 Methods of Recognizing Revenue and Costs of Construction Contracts

1.2.3.1 Method of Recognizing Revenue from Construction Contracts

Revenue recognition is the accounting process that determines the timing when revenue is recorded in the financial periods This involves not only identifying when revenue and costs occur but also directly impacts on the profit reported in each accounting period of the enterprise

According to Vietnamese Accounting Standard VAS 15, revenue from construction contracts is recognized in two scenarios: cases where the contract

18 stipulates that the contractor is paid based on the scheduled progress and cases where the contractor is paid based on the value of the work completed a Case where the contract stipulates that the contractor is paid based on the scheduled progress

In a construction contract, when the outcomes can be reliably estimated, revenue is recognized based on the portion of work completed, independent of the billing process This approach accurately reflects the actual progress and financial status of the enterprise at each reporting moment, unaffected by external payment schedule factors b Case where the contract stipulates that the contractor is paid based on the value of the work completed

When the outcomes of a construction contract can be reliably estimated and are confirmed by the client, revenue is recognized corresponding to the portion of the work completed and verified by the client, as reflected on the issued invoices

Thus, the revenue recognition method in both scenarios is quite clear However, the question that needs explanation here is how to estimate construction performance reliably, as these are only estimates Due to the nature of the construction industry, each different type of contract has different estimates depending on the contract terms, making it challenging to reliably estimate construction results

CURRENT STATE OF REVENUE AND COST ACCOUNTING

GENERAL OVERVIEW OF HHK VIETNAM LLC

2.1.1 General Introduction to HHK VIETNAM LLC

Company Name: HHK VIETNAM LLC

International Name: HHK VIET NAM COMPANY LIMITED

Address: No 185 Chua Lang Street, Lang Thuong Ward, Dong Da District, Hanoi City, Vietnam

Legal Representative: Mr Pham Duy Khuong, Director The company commenced operations on July 14, 2022

2.1.2 Characteristics of business operations in HHK Vietnam LLC

HHK VIETNAM LLC operates in the field of processing, installation, and finishing of construction and civil industrial projects

- Installation of water supply, drainage, heating, and air conditioning systems

- Installation of other construction systems (Installation of machinery and mechanical equipment)

- Wholesale of other household goods (Household electrical appliances, lamps and lighting equipment)

- Wholesale of industrial machinery, equipment, and parts

- Wholesale of other machinery, equipment, and parts (Boiler machinery and equipment, )

- Wholesale of metals and metal ores (Wholesale of iron, steel)

- Wholesale of other construction installation materials and equipment (excluding inland waterway port operations)

- Architectural activities and related technical consultancy (Civil and industrial constructions)

Table 2.1: List of Machinery and Equipment

No Type of Machinery/Equipment Country of

2 Hitachi Seiki Milling Machine Japan 1

3 TUDA MYLER Universal Lathe Japan 2

4 Yoshira M34 Radial Drilling Machine Japan 2

7 Stanley SM18 Band Saw China 2

8 Longrun Plasma Cutter South Korea 2

9 RILAND Tig 200CT Welding Machine China 2

11 BENDER Rebar Bender South Korea 1

(Source: Administrative Department - HHK VIET NAM LLC)

Rough construction of the building

Despite being a newly established company, HHK VIETNAM LLC continually strives to fully equip its office system, ensuring optimal conditions for its employees The company maintains a modern, high-quality array of construction equipment Below is a list of typical equipment used for construction and production:

In addition, there are several other specialized machines and equipment, such as: 3 - and 5-ton gantry cranes, universal lathes, sand milling machines, thermocans, pattern making tables, molding casts, pouring pots, various types of Boss machines, and product cleaning machines, etc b Technological Process

Each construction project typically includes various sub-projects, each with multiple detailed construction phases Therefore, the company must have a rational and rigorous production process to ensure the proper management and recording of all incurred costs

Figure 2.1: Typical production process of HHK VIET NAM LLC

Installation of electrical and plumbing systems

Construction of reinforced concrete frames

Figure 2.2: Organization structure of HHK VIET NAM COMPANY LIMITED

- Responsible for all aspects of the company’s production and business

- Defines the authority of departments, heads, and deputy heads, and project leaders

- Organizes the implementation of decisions made by the board of members

- Organizes the execution of the company’s business and investment plans

- Submits financial reports and adjustments to the board of members

- Manages employment and labor policies

- Generally responsible for joint ventures and partnerships

The deputy director is responsible for reporting to the director about activities related to their area of responsibility, assisting the director in managing and operating the subordinate departments

- Organizes accounting work and construction accounting

- Develops financial plans according to regulations

- Organizes the implementation of financial revenue and expenditure plans, cost plans, and oversees these plans

- Maintains close relationships with credit institutions and banks for borrowing and funding

- Handles financial settlements and analyzes the financial operations

- Monitors the use and turnover of working capital

- Coordinates with functional departments and units to organize a streamlined, strong, and effective administrative system

- Develops work rules, functions, and authority of the construction teams

- Plans long-term and annual short-term personnel tasks

- Inspects personnel work, recruitment, transfers, and promotions

Functions include inviting tenders, preparing tender documents, conducting bidding, and designing construction drawings if required by the project

- Develops and implements construction plans, detailed construction approaches, and schedules for each project phase

- Supervises and manages construction to ensure project timelines

- Manages quality and safety, inspects materials and supplies during construction

- Regularly updates the progress and quality of the project to the board of directors and investors

Construction Teams: These are the production units directly creating the output for the Company, working directly and indirectly with the Board of Directors, functional departments, and representative offices Managed by the Construction Department and directly by the Site Manager

2.1.5 Organizational Features of Accounting Work at the Company

2.1.5.1 Accounting Department Organization Model at HHK VIET NAM LLC

The accounting department of the company is organized in a centralized accounting form All accounting tasks are carried out at the company’s accounting department

At each construction team, a statistical employee is assigned to manage, monitor labor time, compile the completed work volume of their unit, distribute wages to the workers, and simultaneously collect and compile various accounting documents, periodically sending the classified documents back to the accounting department for settlement and advance payments

After receiving these accounting documents, the accounting department conducts checks, classification, document processing, detailed ledger entries, and summary figures, thereafter providing accounting information for management and operational activities At the end of the fiscal year, the accounting department determines business results, fulfills obligations to the state, and prepares financial statements

Thus, the accounting department of the company is tasked with organizing all accounting activities All accounting tasks are methodically performed in the accounting department, from checking and classifying documents to entering detailed and summary ledgers, ensuring timely and accurate accounting information is available for managing and operating business activities

2.1.5.2 Accounting Policies Applied at the Company

The company adopts accounting regulations according to Circular 200/2014/TT-BTC issued on December 22, 2014, by the Minister of Finance with the fiscal year being the calendar year (starting from January 1 to December 31 annually) The company’s financial statements include:

- Financial Statements Notes Currency unit: Vietnamese Dong (VND)

Inventory accounting method: Perpetual inventory system, detailed inventory accounting using a card system,

Inventory valuation method: First-In, First-Out (FIFO) method

Depreciation method: Straight-line depreciation

Value-added tax (VAT) calculation method: Credit method

Accounting record-keeping format: Voucher - Ledger

Accounting software: The company only uses Excel for its operations

Figure 2.3 Process of Accounting Record-Keeping in the

Voucher-Ledger System Note: Daily entries

Reconciliation entries End-of-period entries

CURRENT STATUS OF REVENUE AND COST ACCOUNTING FOR

2.2.1 Current situation regarding construction contracts at the company

Currently, construction contracts at construction companies are typically categorized based on the method of obtaining the contract, namely, through competitive bidding and direct appointments HHK VIET NAM LLC, being a small and medium-sized enterprise, is only allowed to participate in bidding processes and does not engage in direct appointments Therefore, currently, the company only holds contracts obtained through competitive bidding

Detailed accounting ledgers and cards

Summary of vouchers Original documents

General ledger of accounts Voucher entries

Voucher registration ledger Cash book

Bidding is a process where contractors submit their tender documents based on the tender invitation from the project owner The tender documents must include comprehensive details such as financial capacity, technical ability, experience, and cost estimation The project owner organizes the bidding and selects the contractor based on predefined criteria The selected contractor is the one who participates in the bidding and wins the tender

Once the project owner selects the winning contractor, the construction contract is established based on agreements between the parties concerning the production of construction products The initial contract value is the estimated price prepared by the contractor Specifically:

For contracts obtained through bidding, the estimate in the tender document is approved by the project owner based on technical standards and basic construction unit prices as regulated by the state for each region

Currently, the basic content of construction contracts at the company includes terms such as:

- Content of work and products of the contract

- Conditions for acceptance and handover of works

- Suspension or termination of the contract

- Rights and obligations of the parties

- The following documents are considered inseparable parts of the construction contract:

+ Tender documents, technical proposal documents, financial proposal documents

+ Documents approving the tender results

+ Tender award notifications, decision on appointment

+ Any additional annexes if applicable

Regarding the Price of Construction Contracts:

It is the amount the contractor commits to pay the subcontractor to perform the work volume as required by the quality, schedule, and other requirements specified in the construction contract

The price of the construction contract depends on the agreement between the project owner and the contractor, tailored to meet the needs and market conditions as well as the business characteristics of the company Below are the prices of some construction contracts surveyed at HHK VIET NAM LLC

Table 2.2: Prices of Some Construction Contracts at HHK VIET NAM LLC

Contract Description Value (VND) Completion

Supply of materials and construction of signage

Installation services for flagpoles and signage

Installation of corrugated fences, steel decks for air conditioning, safety frames for elevators, windows

Pile drilling construction 1,957,600,000 6 months Fixed unit price

Plastering, tiling and smoothing from axis 19 to between axes 9-10

(Source: Financial Accounting Department, HHK VIET NAM LLC)

Most of the construction contracts of the company are currently fixed-price contracts, however, the fixed price may be adjusted according to specific terms written in the contract The fixed price set in the company’s construction contracts is the bid-winning value that has been approved based on the contractor’s tender documents

In practice, the company has not yet had any construction contracts determined with additional costs, as this type of contract is typically applied to extremely large projects, with long construction periods and many changes during construction, such as: transportation infrastructure projects, hydroelectric and irrigation works, etc

Regarding the payment method of the contract:

Since all of the company’s construction contracts are obtained through bidding, according to construction law, the project owner (Party A) will make an advance payment immediately after the contract takes effect (usually 20% of the contract value) Subsequently, the contract payments are made according to the capital arrangement plan of the competent authority and the construction progress made by Party B (the contractor) After the completion of the product, both parties will proceed with acceptance, final settlement, and contract termination

The payment method chosen by the company is based on the actual volume completed; the company almost does not apply the payment method according to the planned progress

Table 2.3: Payment Methods for Some Construction Contracts at HHK VIET NAM LLC

Construction contracts Value (VND) Payment method for CC

Structure of the body from the 6th floor to the roof (10th floor) Block B4 - The Pride

8.307.450.000 Payment based on actual volume completed

Foundation and basement structure Block

Plastering, tiling, and smoothing from axis

Insurance and Warranty for Construction Works

The contractor and the subcontractor will agree and specify in the contract the warranty conditions, warranty period, and responsibilities of the parties for the warranty of construction works The warranty content follows the regulations on quality management of construction works

HHK VIET NAM LLC’s construction contracts typically require the contractor to purchase insurance for machinery and equipment used in construction, insurance for the workers, and civil liability insurance for third parties

The contractor is responsible for warranting the construction items after handover to the project owner The warranty content includes repairing damage, defects, or inadequate quality, or when the construction operates abnormally due to the contractor’s fault

Depending on the contract’s stipulations, the warranty value is 3% corresponding to the final settlement price of the construction over 2-3 years for large projects, or 5% corresponding to the final settlement price over one year The contractor is only reimbursed for the construction warranty amount after the warranty period ends and upon the project owner’s confirmation that the warranty work has been completed

Table 2.4: Insurance and Warranty for Some Construction Contracts at HHK VIET NAM LLC

Warranty Period for the Works

Warranty Amount for the Works

Supply of materials and construction of signage

Installation services for flagpoles and signage

Pile drilling construction 1.957.600.000 Contractor 2 years 3%

Plastering, tiling and smoothing from axis 19 to between axes 9-10

2.2.2 Current Status of Revenue and Cost Accounting for Construction Contracts at HHK VIET NAM LLC

2.2.2.1 Revenue Content of Construction Contracts

The revenue from construction contracts at HHK VIET NAM LLC includes:

- The amount the company earns from the volume of construction work completed and accepted for payment by the project owner, as recorded on the price sheet

- The amount received is due to changes in the prices of input factors

- The amount the company earns due to changes in design and the volume of work performed under the contract

Furthermore, there are instances where the company may receive bonus payments for early completion or as compensation for errors accepted by the project owner These are not recorded on the provisional value completed sheet and thus are not accounted for in revenue according to accounting standards but are recorded as other income Therefore, the company’s revenue is not fully reflected accurately

2.2.2.2 Method of Recognizing Revenue for Construction Contracts

Based on the payment method, HHK VIET NAM LLC recognizes revenue according to the value of work completed The timing of revenue recognition for construction contracts varies, depending on the regulations related to each specific construction item in the contract

COMMENTS FOR THE CURRENT STATE OF REVENUE AND EXPENSE

2.3.1.1 Regarding the Company’s Accounting Structure

The accounting structure of the company is organized in a centralized model, fully responsible for accounting activities, which aligns well with the company’s management needs Consequently, the accounting structure has become a powerful support system for the company’s leadership in decision-making and policy direction for business operations The accounting department is responsible and independently handles its assigned accounting tasks under the guidance and control of the Management Board, thereby minimizing potential errors and fraud in accounting activities

Besides, the professional level of accountants in the company is relatively high, experienced, skilled, and enthusiastic, which facilitates the effective understanding and application of new accounting standards and policies

2.3.1.2 Regarding the Organization of the Accounting System, Documents, and Books

The account system and accounting books are used appropriately according to accounting regulations The accounting process is strict, and all transactions are clearly and fully reflected

The accounting documentation system used at the company is very scientifically organized, ensuring compliance with the accounting regulations regarding the categories, processes of preparation, and circulation of documents, which facilitates

50 accounting tasks Documents are timely prepared and correspond to the economic transactions that occur, and those sent from construction teams and subsidiaries are fully gathered by the project for accounting entries

The documents are circulated correctly and preserved and stored according to the state’s requirements for document conservation and storage Based on these documents, as per the current regulations, the company has developed its document system suitable for its production organization characteristics

2.3.1.3 Regarding Accounting for Construction Contract Revenue

The company uses fixed-price construction contracts with clauses for price changes when variations occur outside the scope of the contract, which is suitable for the current characteristics of construction contracts in Vietnam Tracking revenue and managing the costs of construction contracts are two fundamental issues in the company’s construction contract accounting

The company’s construction contracts usually specify payment methods based on the actual volume of work done Revenue from construction contracts is relatively certain once confirmed by the project owner and the technical consultant, as reflected in the acceptance certificates and the interim valuation of work completed

Revenue and expenses from construction contracts are monitored per each signed contract, which helps the management easily oversee and update data as needed

The company determines completed work using the method that evaluates the volume of work completed, which helps the company to estimate revenue quite accurately

Accounting based on the interim valuation of completed work volumes and VAT invoices issued to the project owner for recognizing construction contract revenue is entirely suitable for the characteristics of construction contracts and complies with the regulations on management and use of invoices It facilitates the easy verification of output VAT and receivables from the project owner

2.3.1.4 Regarding Accounting for Construction Contract Costs

The company prepares cost estimates at the signing of construction contracts, monitoring cost items related to each specific case code or construction contract, helping the accounting to gather relatively complete costs related to the construction contracts This has increasingly saved costs and improved capital efficiency

General production costs are gathered separately for each construction item, saving the accountants time in allocating costs and avoiding potential mistakes that could occur during the cost allocation process

The cost of goods sold is recorded immediately after revenue recognition from the completion of the construction item, ensuring the principle of matching

In every field and especially in accounting, perfection is unattainable; only relative achievement is possible Despite the advantages in the accounting work at the company, there are still some existing issues:

2.3.2.1 Regarding the Company’s Accounting Structure

The separation between the company’s office department and the construction teams, due to the lack of centralized management, makes it difficult to maintain regular control from the Board of Directors over the construction teams Managing through the project management board can be challenging, relying heavily on reports from the project managers The company’s office accounting may record revenue and expenses based on documents gathered by the team’s accountants, which might not be comprehensive or correctly categorized, leading to incorrect accounting entries that affect the revenue, costs, and determination of the company’s business results

2.3.2.2 Regarding the Organization of Documents, Document Circulation, Accounts, and Accounting Books

The time frame for submitting documents is quite long (a week), and document circulation is often inaccurate and untimely due to the remote construction sites from the company’s headquarters In some cases, transportation damage or losses occur

52 while the documents have not yet been accounted for This significantly impacts the company’s cost accounting work

2.3.2.3 Regarding Revenue Recognition and Accounting for Construction Contracts

Some revenue items from construction contracts still do not align with accounting standards and regulations Bonuses for exceeding contract specifications in terms of time and quality, other payments received from the project owner or third parties due to the owner’s delays, errors in technical specifications or design, and disputes over changes in contract execution should be recognized as construction contract revenue, but the company accounts for them under other income

This accounting does not accurately reflect the nature of the revenue from the project owner and third parties

The completed work for each construction item is evaluated solely through the method of assessing the volume of work completed This method is suitable for most types of construction contracts but requires experienced and technically proficient staff as well as a high level of consensus among participants in the acceptance committee If significant disagreements occur during the acceptance process and are not quickly resolved, it will prolong the acceptance period and impact the construction process as well as the recording of revenue and cost of goods sold for the company’s construction contracts

2.3.2.4 Regarding Cost Content Determination and Accounting for Construction Contract Costs

The current determination of construction contract costs at the company often lacks completeness, reasonableness, and uniformity Many cost items that should be included in construction contract costs are not:

- Interest expenses: Currently, the company records all interest expenses under financial activities (Account 635), regardless of whether these costs qualify for capitalization According to current accounting regulations, interest expenses that qualify should be recorded under construction contract costs

- Warranty costs for constructions: According to accounting standard No 15, warranty costs should be part of construction contract costs, but they are currently recorded under selling expenses, and the company does not accrue for them Instead, actual warranty costs are deducted from revenue in subsequent periods, which does not correctly reflect the nature of the transaction, although it ultimately reduces the company’s profit

IMPROVING THE ACCOUNTING OF REVENUES AND COSTS

BUSINESS DEVELOPMENT DIRECTION FOR CONSTRUCTION

With the increasing pace of urbanization and the modernization of infrastructure, construction activities will continue to expand The market for construction enterprises is broadening along with increasingly intense competition from both domestic and international businesses, compelling every enterprise in the construction industry to give their utmost effort Recognizing the importance of this issue, HHK VIET NAM LLC has been continuously developing and successfully meeting the targets set by the company’s management

In the coming years, the company will strive to expand its market presence both domestically and into the potentially lucrative international markets

Modernizing equipment and office facilities, continuously researching, and applying the most advanced construction technologies to enhance product quality to meet the growing demands of the market

The team of young, enthusiastic, and dynamic staff, quickly adapting to scientific advancements and not only gaining experience from past projects but also learning from the experiences of seasoned veterans in constructing high-rise buildings and major projects With solid professional skills and a professional work style, this stems from the recognition that human resources are the core and a valuable asset of the company, bringing economic value to the business operations One of the next steps is to intensify investments in depth, improving the quality of management, technical staff, and specialized workers

Thus, with capability, experience, creativity, and an adaptable operational mechanism, HHK VIET NAM LLC affirms that it will deliver customer satisfaction in terms of product quality, investment value, and enhanced brand value in the coming time.

SOLUTIONS TO IMPROVE THE ACCOUNTING OF REVENUE AND

3.2.1 Improving the organization of the management structure and document circulation

The construction and perfection of the management structure must ensure optimization, flexibility, economy, and reliability The current management structure of the company is quite delineated, but the company should add an internal control department, operating separately from the financial accounting department to avoid risks of misconduct arising in the financial statements Controlling the documents submitted by the teams is extremely important as it directly affects the accounting of construction contract costs

Detailed information about revenue, costs, receivables, and payables directly related to the construction contracts as well as the methods for determining revenue and the completed portion of the construction work should be further included in the financial statements, specifically in the explanatory notes of the company’s financial reports

Besides, the company should require accounting teams to compile complete accounting documents and send them regularly to the accounting department so that the workload of accountants is spread out and not concentrated at the end of the month as currently Some companies have implemented updating documents online through accounting software, but this can be costly, and data may be at risk of viruses and not secure

3.2.2 Improving Issues Related to Construction Contracts

Currently, most of the company’s construction contracts are fixed-price contracts obtained through direct appointment While this type of contract may suit the company’s current characteristics, it could pose challenges for accounting in the context of future market expansion goals

Therefore, in cases involving construction contracts with multiple work items, large work volumes, long durations, spanning multiple accounting periods, complex technical designs, and containing many uncertain factors, the company should proactively negotiate with investors to sign construction contracts with additional costs or contracts that combine both fixed-price and additional cost features This type of contract will limit risks for the company when there are significant market price fluctuations, natural disasters, fires, and many other impacting factors during the construction period It also harmonizes the interests of all parties involved in the contract

3.2.3 Improving the Accounting of Revenue for Construction Contracts

The current revenue content of the company’s construction contracts still has some points that are not in compliance with the directives of circulars and accounting standards The revenue amounts resulting from exceeding contract specifications in terms of time and quality of construction, other payments obtained from the investor or third parties due to delays caused by the investor; errors in technical specifications or design and disputes about changes in contract execution must be recognized as construction contract revenue, not other income

For example, with construction contract number 1208/2023/HĐKT/PL.HN- HHK regarding the Supply and Installation of Traffic Safety Signs at Dong Van Industrial Park, Duy Tien Town, Ha Nam: during the construction of the first phase of the project, a dispute arose over changes in technical design between the investor and the contractor, thereby necessitating compensation by the investor Recording this compensation as other income by the company’s accounting is incorrect as per accounting standard number 15 This compensation should be included in the construction contract revenue, which would be more appropriate and aligned with VAS 15 concerning construction contracts

Currently, most of the company’s contracts are fixed-price, and there have not yet been any additional cost construction contracts Beyond the traditional revenue determination methods for construction contracts, the company should explore other methods to apply to different types of construction contracts in the future

Specifically, for additional cost construction contracts: If the additional part is calculated as a certain percentage of the total costs incurred and paid, then the revenue is recognized as:

Revenue of the contract recognized in the period equals Total costs incurred of the work completed in the period x (100%+T%)

(Where T% is the percentage of the additional part stipulated in the Contract)

If the additional part is a fixed amount, the company will evenly distribute this additional amount over the expected duration of the construction contract, based on the ratio of work completed to the total work required by the contract or according to the cost ratio corresponding to the part of the work completed relative to the total estimated cost of the entire project

In all cases, the contractor must agree in advance with the investor on the method for determining the revenue of the construction contract to ensure consistency and to avoid unnecessary disputes during the execution of the project or work item

3.2.4 Improving the the Accounting of Costs for Construction Contracts

Correctly identifying the cost content of construction contracts in alignment with current accounting standards is extremely important, as it directly affects the cost accounting and determination of the business operations’ effectiveness for the company’s accounting The types of costs related to construction contracts that the company needs to be aware of include:

Interest costs that qualify for capitalization related to construction contracts are recorded as construction contract costs The company’s accounting needs to revisit standard number 16 regarding borrowing costs to determine which borrowing costs qualify to be recognized as costs related to construction contracts for the period

Penalties for contract violations and technical assistance costs related to construction contracts increase the costs of construction contracts

Recoverable amounts from the sale of scrap, surplus materials, and the disposal of machinery and equipment for each construction contract should be recorded as reductions in construction contract costs

General construction-related costs (GCRC) are tracked separately for each project item If any GCRC arises that cannot be directly tracked, accounting must choose an appropriate cost allocation method, criteria most suitable to the business characteristics and product to determine the costs and results of the construction contract most accurately

Costs related to construction warranties can often occur and be significant; therefore, the company should make provisions, reflecting the reserve in the accounting figures for easy monitoring For provisions related to construction work to be paid, established for each project and entered at the end of the accounting year or mid-term The accounting records: Debit Account 627 - Construction Warranty Costs to be Provisioned Credit Account 352 - Provision for Expenses Payable related to Construction Warranty

The expenses related to the provisions initially established are compensated by the provision for expenses payable If the provision for construction-related expenses established is greater than the actual costs incurred, the difference is reversed into other income Debit Account 352 - Difference in Provision for Expenses Payable Previously Established Credit Account 711 - Other Income

RECOMMENDATIONS FOR IMPROVING REVENUE AND COST

3.3.1 For the State and Regulatory Agencies

These are macro-level conditions and must be implemented synchronously from the Government to relevant regulatory bodies The tasks to be undertaken are:

The legal environment is one of the critical factors that decisively influence economic growth in general and the development of enterprises in particular Therefore, the State and regulatory bodies need to review and refine legal documents related to corporate accounting and finance to ensure consistency among these documents

The Ministry of Finance should continue to develop and perfect the Vietnamese Accounting Standard No 15 “Construction Contracts” to harmonize with international accounting standards and align with other related regulatory documents

The Ministry of Construction should continue to amend, supplement, and perfect regulations related to construction contracts, norms, and estimated unit prices for each province, city, and other legal documents in the construction sector to facilitate more flexible and effective operations for construction enterprises

The Ministry of Finance and the Ministry of Construction need to align regulations related to the revenue and costs of construction contracts, especially concerning cost estimation in cases such as fluctuations in the prices of input factors, or economic and technical norms in the construction sector These issues significantly impact the cost gathering process and the calculation of costs for projects and project items because before the implementation, enterprises must estimate costs (design estimates, manual estimates) in detail for the construction work volume as a basis to strictly manage the construction process Therefore, there should be specific and unified guidelines to limit the difficulties that enterprises face in practice

Attention to the human factor

With the goal of gradually building and forming a professional, skilled accounting staff adapted to the market economy, creating a conducive environment for accounting staff to exchange professional experiences, and improve qualifications while acting as a bridge for Vietnamese accountants to gradually integrate with the region and the world The State and functional ministries and agencies need to expand training forms to support accounting work, with strict control over training content and programs to ensure training quality Direct universities and vocational schools to include essential content for accounting in the integration process, such as the accounting standards of some developed market economies, to help students access new professional knowledge for their future professional work

Organizing quality control of accounting work

For the accounting profession in general, and the accounting of revenue and costs of construction contracts in particular, to reach a high professional level appropriate to the country’s renovation process, besides implementing the above two actions, the State needs to organize the inspection and control of the quality of accounting work, clearly define the responsibilities of the regulatory agencies for organizing and inspecting accounting work at enterprises Enhance the role of the Vietnam Association of Accountants and Auditors so that the association truly becomes a professional organization in accounting and auditing

Construction companies in general, and HHK VIET NAM LLC specifically, are directly responsible for implementing and applying accounting standards for revenue and costs of construction contracts Therefore, in addition to studying the accounting standards on construction contracts, guidelines from the Ministry of Finance, and sector-specific documents from the Ministry of Construction, HHK VIET NAM LLC along with other domestic construction enterprises need to:

- Recognize the role, importance, and effectiveness of applying accounting standards and regimes in accounting for revenue and costs of construction contracts

- Thoroughly understand and flexibly apply Vietnamese Accounting Standard

No 15 and related policies and guidelines on accounting in general, and the accounting of revenue and costs for construction contracts in particular

- Organize training for management and accounting department staff to update them on new standards, policies, and regimes in construction accounting

- Management and accounting personnel in enterprises should be proactive and diligent in researching, understanding, and updating their knowledge on standards, policies, and regulations related to accounting to effectively apply innovative practices, thus ensuring the accounting functions meet the management requirements of enterprises and align with the trends of the economy and financial market

- Arrange, adjust, and design an effective system for controlling costs and revenues of construction contracts

- Facilitate the provision of material conditions to help accountants improve their ability to timely and effectively update and apply new accounting standards and policies

Based on the theoretical research on revenue and cost accounting in construction activities at the company and the actual economic and financial situation, the revenue, and costs of construction activities at the company, this thesis has demonstrated the necessity of designing and requiring the perfection of accounting for revenue and costs of construction contracts From this, the thesis proposed solutions to perfect the accounting of revenue and costs of construction activities From a financial accounting perspective, the thesis offers the following solutions:

- Improve the accounting of revenue from construction activities, focusing on perfecting the identification of revenue content of construction contracts, perfecting the recognition of revenue, and accounting for construction contract revenue

- Improve the accounting of construction costs

- Enhance the disclosure of information related to construction activities on financial statements

The thesis also makes several recommendations for implementing solutions from the state, regulatory bodies, and the company

Over the past few years, difficult economic conditions have significantly impacted industries involved in production and business in general, and the basic construction sector in particular This situation demands that enterprises wanting to enhance their competitive abilities to survive and grow in the market must manage their revenues and costs of construction contracts effectively

From a comprehensive study at HHK VIET NAM LLC, I have observed that the accounting work related to the revenue and costs of construction contracts fundamentally meets the regulations of current accounting standards and policies However, if the company could overcome the existing limitations in its accounting practices, management effectiveness could be further improved

My thesis has achieved the following results:

- It has systematized some fundamental theoretical issues regarding the revenue and costs of construction contracts according to Vietnamese Accounting Standard

- It has provided an overview of the accounting situation for the revenue and costs of construction contracts at HHK VIET NAM LLC

- Based on the theoretical issues discussed, the thesis proposes solutions to perfect the accounting of revenue and costs of construction contracts at HHK VIET NAM LLC

I would like to express my deepest gratitude to Professor Lê Văn Luyện and the colleagues in the accounting department at HHK VIET NAM LLC for their enthusiastic support in completing this thesis However, due to my limited knowledge and practical experience, the thesis inevitably has some shortcomings I hope to receive further guidance and contributions from professors and colleagues to improve my work

1 Textbook "Financial Accounting in Enterprises" - Associate Professor Dr Dang Thi Loan - National Economics University - Statistics Publishing House

2 Ministry of Finance (2006), Vietnam Accounting System - Decision 15/2006/QD-BTC dated March 20, 2006, Finance Publishing House, Hanoi

3 Ministry of Finance (2009), 26 Vietnamese accounting standards and all circulars guiding the standards, Statistics Publishing House, Hanoi

4 Ministry of Construction (2008), Circular No 09/2008/TT-BXD dated April 17, 2008 guiding price adjustments and construction contracts due to fluctuations in prices of raw materials, fuel and construction materials, Hanoi

5 Ministry of Construction (2009), Circular No 05/2009/TT-BXD dated April 15, 2009 guiding the adjustment of construction estimates, Hanoi

6 Textbook "Financial Accounting" - Ho Chi Minh City University of Economics - Transport Publishing House

7 Competency profile at the Finance and Accounting Department of HHK VIET NAM Co., Ltd

8 Nguyen Thi Thanh Loan (2003), Perfecting revenue and cost accounting of construction contracts at Vietnamese irrigation construction enterprises, Doctoral thesis, Hanoi

9 Nguyen Viet (1995), The issue of perfecting Vietnamese accounting, Economic thesis, Ho Chi Minh City University of Economics

APPENDIX 1: ACCEPTANCE CERTIFICATE FOR COMPLETED

SOCIALIST REPUBLIC OF VIETNAM Independence – Freedom - Happiness

ACCEPTANCE CERTIFICATE FOR COMPLETED CONSTRUCTION

Investment in Construction and Business of Infrastructure at Dong Van I Industrial Park Expansion to the Northeast of Vuc Vong Intersection Phase I, Ha Nam

Package Supply of Materials and Construction of Signage

Location: Bach Thuong Ward, Duy Tien Town, Ha Nam

1 Direct Acceptance Participants, Confirmation: a Representative of the Investor:

Position: Deputy Director of Project Management

Position: Deputy Director of Project Management b Representative of the Construction Unit: HHK VIET NAM LLC

3 Proceedings of the Acceptance Committee: a Reviewed the following documents and materials::

- Approved design documents and construction drawings

- Documents checking the quality and volume of work completed in the phase

- Technical standards applied during construction, testing, and acceptance b Comments on the timing, volume of construction work, and quality:

Cumulative up to the end of the previous period

Cumulative up to this period

- Modifications compared to approved design: None

- Conclusion: Accept the acceptance of the construction for Phase I

(Source: Financial Accounting Department, HHK VIETNAM LLC)

APPENDIX 2: SUMMARY TABLE OF COMPLETED VOLUME

APPENDIX 3: REQUEST FOR ADVANCE PAYMENT

HHK VIET NAM LLC Reference: 43/CV-HHK

“Re: Advance Payment for Supply and Installation of Signage”

SOCIALIST REPUBLIC OF VIETNAM Independence – Freedom - Happiness

Investment in Construction and Business of Infrastructure at Dong Van I Industrial Park Expansion to the Northeast of Vuc Vong Intersection Phase I, Ha Nam

Package Supply of Materials and Installation of Signage

Location: Bach Thuong Ward, Duy Tien Town, Ha Nam

Based on the construction contract No 1208/2023/HĐKT/PL.HN-HHK dated August 12, 2023, regarding "Supply and Installation of Signage System" under the project "Investment in Construction and Business of Infrastructure at Dong Van I Industrial Park Expansion to the Northeast of Vuc Vong, Phase I – Ha Nam Province" at Bach Thuong – Duy Tien Town – Ha Nam Province;

Based on the interim valuation of work completed for phase 1 signed on September 22, 2023

HHK VIET NAM LLC hereby requests your company to advance the value of the completed construction for phase 1 of the construction contract No 1208/2023/HĐKT/PL.HN-HHK as follows:

No Description Amount (VND) Notes

I Total contract value 413.089.524 Π Advance payment as per contract (clause

III Value of construction completed this phase

III 1 Advance for this phase 321.167.592

IV Value previously advanced, cumulative up to before this phase

IV.1 Value of contract advances 107.547.000

V Value of advance recovery this phase 80.291.898 V=V.1

V.1 Value of contract advance recovery this phase

VI Value requested for advance this phase 176.642.176 VI

(Amount in words: One hundred seventy-six million, six hundred forty-two thousand

The requested advance payment should be transferred to the account of HHK VIET NAM LLC, Account No: 1038236886 at Vietcombank - Transaction Office Branch

Therefore, we kindly request the attention of , the Management Board of the

Dong Van I Industrial Park expansion project, Ha Nam for resolution

(Source: Financial Accounting Department, HHK VIETNAM LLC)

APPENDIX 4: SUMMARY TABLE OF ADVANCE PAYMENT FOR

Item: P, W, R, I Signs, Street Poles, Street Name Signs, Construction

Stage advanced according to completed volume

No Work Description Unit Quantity

REPRESENTATIVE OF THE PROJECT MANAGEMENT BOARD

APPENDIX 5: VALUE – ADDED TAX INVOICE

Address: No 185 Chua Lang Street, Lang Thuong, Dong Da, Hanoi

Payment Method: Bank transfer Tax ID: ………

No Description of Goods or

Advance for the completed phase 1 construction -

Amount in words: Three hundred twenty-one million, one hundred sixty-eight thousand dong

Head of the Unit (Signature, seal, full name)

APPENDIX 5: DETAILED LEDGER FOR ACCOUNT 5111

No 185 Chua Lang Street, Lang Thuong, Dong Da, Hanoi

(EXTRACT) DETAILED LEDGER ACCOUNT: 5111- Construction Revenue

August 2023 Project Name: Supply and Installation of Signage Contract Package

Balance at the beginning of the period - -

Advance for the completed phase 1 construction - Installation of signage

Revenue transfer for construction project XD022

Balance at the end of the period - -

Chief Accountant (Signature, full name)

(Source: Detailed Ledger for Account 5111 - Case XD022, HHK VIET NAM LLC)

APPENDIX 6: GENERAL LEDGER FOR ACCOUNT 5111

Date SH NT Description Page Line

Advance for the completed phase 1 construction

Revenue transfer for construction project XD022

Prepared by Chief Accountant Director

(Signature, full name) (Signature, full name) (Signature, full name)

(Source: Detailed Ledger for Account 5111 - Case XD022 HHK VIET NAM LLC)

July 2023 Project Name: Supply and Installation of Signage Contract Package

Balance at the beginning of the period

Purchase of street name signs

PKT1013 31/07 Transfer of direct material

Total transactions for the month

Balance at the end of the period

(Source: Detailed Ledger for Account 621 - Case XD022 of HHK VIET NAM LLC)

Purchase of street name signs

Transfer of direct material costs for project XD022

Direct labor costs for team 10/13 Nguyen Manh Tuan

31/07 PKT1015 31/07 Costs for outsourced labor 3348 15.345.000

Transfer of direct labor costs for project XD022

Total transactions for the month 91.500.000 91.500.000

Direct labor costs for team 10/13 Nguyen Manh Tuan

Transfer of direct labor costs for project XD022

Account: 623 - Cost of Construction Equipment Usage

Num ber Date Debit Credit

Balance at the beginning of the period - -

Rental of construction machinery for pile driving

Depreciation of machinery used in construction

Transfer of costs for construction machinery for project XD022

Total transactions for the month 28.345.321 28.345.321

Account: 623 - Cost of Construction Equipment Usage

Rental of construction machinery for pile driving

Depreciation cost of machinery used in construction

Transfer of costs for construction machinery

Electricity costs for July 2023 at Duc Thuong site

0970 31/07 Salaries for site management staff 3341 8.590.000

Transfer of general production costs for project XD022

Total transactions for the month

Salaries for site management staff

Transfer of general production costs for

Prepared by (Signature, full name)

Chief Accountant (Signature, full name)

APPENDIX 15: ANNEX 01: CONTRACT VALUE BREAKDOWN

(Associated with Contract No 1203/2023/HĐKT/IN15-HHK, signed on March

Contract Package: Supply and installation of tole fence, steel floor for air conditioning, safety reinforcement frames for elevators and windows

Project: Miracle Tower Residential and Office Complex

Location: Lang Ha ward, Dong Da district, Hanoi

No Item Description Unit Quantity

Double-sided white ceramic tole panel fence

+ Size per panel 1800 cm*25cm;

+ Galvanized steel box column 50x50x1,4mm, spacing 3m;

+ Galvanized steel box spine 20x40x1,4mm, spacing 900mm

Hot-dipped galvanized steel floor, edge slat:

Safety reinforcement steel frame for elevator area and windows

REPRESENTATIVE OF PARTY A REPRESENTATIVE OF PARTY B

(Source: Financial Accounting Department of HHK VIET NAM LLC)

Tiêu đề	Improving the Accounting of Revenue and Costs of Construction Contracts at HHK Viet Nam LLC
Tác giả	Ta Thi Thu Ha
Người hướng dẫn	Assoc.Prof.Dr. Le Van Luyen
Trường học	Banking Academy
Chuyên ngành	Accounting - Auditing
Thể loại	Graduation Thesis
Năm xuất bản	2024
Thành phố	Hanoi

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