Accounting for construction con- tracts is dealt with in IAS 11 Construction Contracts. This article will look at the core principles involved in IAS 11 and at the end of the article will look at a worked example. The first thing to understand is what a construction contract actually is. According to IAS 11, a construction contract is: a contract specifically entered into for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design and function or their end use or purpose.’
The principal concern of accounting for long-term construction contracts involves the timing of revenue (and thus profit) recognition. Contracts can last for several years and a standard was therefore required to deal with revenue recognition in relation to long-term construction contracts.
To avoid distortions in the presentation of periodic financial statements, the percentage of completion method was developed which reports the revenues proportionally to the degree to which the projects are being completed.