Superseded by IFRS 15. IAS 11 prescribes the contractor’s accounting treatment of revenue and costs associated with construction contracts. Work under a construction contract is usually performed in two or more accounting periods. Consequently, the primary accounting issue is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. IAS 11 requires:
When it is probable that total contract costs will exceed the total contract revenue, the expected loss is recognised as an expense immediately.
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 11 Construction Contracts, which had originally been issued by the International Accounting Standards Committee in December 1993. IAS 11 Construction Contracts replaced parts of IAS 11 Accounting for Construction Contracts (issued in March 1979). This Standard was superseded by IFRS 15 Revenue from Contracts with Customers.
IAS 11 Construction Contracts provides requirements on the allocation of contract revenue and contract costs to accounting periods in which construction work is performed. Contract revenues and expenses are recognised by reference to the stage of completion of contract activity where the outcome of the construction contract can be estimated reliably, otherwise revenue is recognised only to the extent of recoverable contract costs incurred. IAS 11 was reissued in December 1993 and is applicable for periods beginning on or after 1 January 1995.
The objective of IAS 11 is to prescribe the accounting treatment of revenue and costs associated with construction contracts. A construction contract is a contract specifically negotiated for the construction of an asset or a group of interrelated assets. [IAS 11.3] Under IAS 11, if a contract covers two or more assets, the construction of each asset should be accounted for separately if (a) separate proposals were submitted for each asset, (b) portions of the contract relating to each asset were negotiated separately, and (c) costs and revenues of each asset can be measured. Otherwise, the contract should be accounted for in its entirety. [IAS 11.8] Two or more contracts should be accounted for as a single contract if they were negotiated together and the work is interrelated. [IAS 11.9] If a contract gives the customer an option to order one or more additional assets, construction of each additional asset should be accounted for as a separate contract if either (a) the additional asset differs significantly from the original asset(s) or (b) the price of the additional asset is separately negotiated. [IAS 11.10] Contract revenue should include the amount agreed in the initial contract, plus revenue from alternations in the original contract work, plus claims and incentive payments that (a) are expected to be collected and (b) that can be measured reliably. [IAS 11.11] Contract costs should include costs that relate directly to the specific contract, plus costs that are attributable to the contractor's general contracting activity to the extent that they can be reasonably allocated to the contract, plus such other costs that can be specifically charged to the customer under the terms of the contract. [IAS 11.16] If the outcome of a construction contract can be estimated reliably, revenue and costs should be recognised in proportion to the stage of completion of contract activity. This is known as the percentage of completion method of accounting. [IAS 11.22] To be able to estimate the outcome of a contract reliably, the entity must be able to make a reliable estimate of total contract revenue, the stage of completion, and the costs to complete the contract. [IAS 11.23-24] If the outcome cannot be estimated reliably, no profit should be recognised. Instead, contract revenue should be recognised only to the extent that contract costs incurred are expected to be recoverable and contract costs should be expensed as incurred. [IAS 11.32] The stage of completion of a contract can be determined in a variety of ways - including the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, surveys of work performed, or completion of a physical proportion of the contract work. [IAS 11.30] An expected loss on a construction contract should be recognised as an expense as soon as such loss is probable. [IAS 11.22 and 11.36]
The gross amount due from customers for contract work should be shown as an asset. [IAS 11.42] The gross amount due to customers for contract work should be shown as a liability. [IAS 11.42]
The general concepts and principles used for revenue recognition are similar between GAAP and IFRS. They differ in the details. GAAP provides specific guidelines for revenue recognition for many different industries, whereas IFRS does not. The International Accounting Standards Board illustrates revenue as including both gains and revenues. When working under GAAP, revenues and gains have completely separate definitions.  Generally, the International Financial Reporting Standards principle for revenue recognition is based on the probability that the economically achievable benefits associated with the transaction will flow through to the company that is selling the goods etc. The costs and revenues must be capable of being reliably measured. GAAP concepts such as realised, realisable, and earned are a basis for revenue recognition. The International Financial Reporting Standards has only one basic standard on revenue recognition. It is titled IAS 18. On the other hand, GAAP has many standards related to revenue recognition. Accounting for revenue provides a most fitting contrast between the International Financial Reporting Standards principal and GAAP rules-based approaches. There are differences on both sides. However, the International Accounting Standards Board and the Financial Accounting Standards Board have identified areas for improvement. Revenue Recognition as Per IFRSRevenue is recognised at the fair value of the consideration received or receivable under the International Financial Reporting Standards. GAAP measures revenue by whichever is more evidence out of the fair value of goods and services that have been given up or the fair value of goods and services received. Under IFRS, revenue from recurring sales and services is recognised in the period in which services or goods are delivered. Revenue is recognised when the goods are transferred to customers in relation to goods. In the case of services, revenue is recognised when services are performed, and the provision for services is provided and rendered available. Generally, the point of sales accounting is similar between both GAAP and the International Financial Reporting Standards. GAAP provides detailed guidelines. An example is accounting for the right of return and multiple deliverable arrangements. The International Financial Reporting Standards prohibit the completed contract accounting method for long term contracts. Percentage of Completion Method for Long Term ContractsUnder IFRS, companies should use the percentage of completion method to account for long term contracts. If costs and revenues are difficult to estimate, companies should recognise revenue to the extent of the costs incurred only. This means taking a cost-recovery approach. When working with the International Financial Reporting Standards, the percentage of completion method and the cost recovery method of accounting for long term contracts are recognised. With the percentage of completion method, companies recognise GP and revenues each period based simply on the construction progress or, in other words, the percentage of completion of the project. Construction costs are accumulated, and gross profit earned to date is added to an inventory account. It also accumulates progress billings in a contra inventory account. This method is the same for IFRS and GAAP. When working with the cost recovery method, contra revenue is sometimes recognised only to the extent of the costs incurred that are expected to be recoverable. Profit is recognised once all costs are recognised. The construction costs, in this case, are accumulated in the Construction in Progress inventory account and progress billings are accumulated in the Billings on Construction in the Progress contra inventory account. The reason that the percentage of completion method of accounting for long term contracts is used is that under most contracts, the buyer and seller both have enforceable rights. The buyer’s right is that he can legally require specific performance on the contract. And the seller legally has the right to require progress payments that provide evidence of his ownership. This result is that a continuous sale occurs as the work progresses. Companies MUST use the percentage of completion method of accounting when the estimates of progress towards completion, revenues, and costs can be reliably estimated and ALL of the following conditions exist: The contract revenue can be reliably measurable,
Companies should use the cost recovery method when ONE of the following conditions applies:
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When using the cost recovery method of accounting for long-term construction contracts under ifrs:
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