IFRS - IAS 11: Construction contracts

IFRS Guide > IAS 11

The International Accounting Standards Committee (IASC) released International Accounting Standard 11 (IAS 11) to address the topic of construction contracts. As construction contracts are often long term in nature, they usually will span a greater time period than a single accounting period. Based on this, commonly questions can rise as to revenue recognition for construction companies.

For example, if a building is 50% done at the end of year one, and it takes two years to complete, the company has effectively ‘earned’ 50% of the contract price despite not being completely finished. The catch is that it must be likely that the project will be able to be finished, so a company cannot recognize revenues on risky projects that they may not be able to finish. This IAS discusses the different forms of contracts as well as bonuses, rules for estimating completion, and accounting for costs of the projects. Expenses must be recorded as they are incurred on construction contracts.

IAS are principles based standards, rather than strict rules based standards that govern international accounting. IAS standards differ from IFRS standards in that they were introduced prior to 2001, whereas IFRS were produced after this date by the IASB, or the International Accounting Standards Board. When determining the hierarchy of these, the IAS is considered to be the building blocks in which the newer and more relevant IFRS are founded and therefore IFRS is more authoritative when these conflict.

Check out more high level explanations of the IASB IFRS in our Guide to IFRS International Financial Reporting Standards!

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