The disclosure of costs and income on incomplete contracts in the financial statements of contractors

Abstract

The standard and generally accepted guideline for the accounting treatment of revenue and costs associated with construction contracts is AC109/IAS11: Construction Contracts which recognises that contract start and end dates usually fall into different accounting periods. This causes the problem that forms the primary focus of this article namely: the allocation of contract revenue and costs to the accounting periods in which construction work is performed. Critical to the above allocation is the ability to determine percentage of completion of contract and cost to completion at the balance sheet date (reporting date). The important activities in this regard according to AC109/IAS11 are to “measure” and “estimate” reliably. AC109/IAS11 contains detailed guidelines on how these aspects should be dealt with. However questions arise as to who the relevant role players are and how these actions should be performed. It seems obvious that the guidelines used for determining the stage of completion should correspond with the guidelines for on site cost control. AC109/IAS11 gives guidance by stating clearly that the provisions of the statement should be read in conjunction with AC000/Framework: Framework for the preparation and presentation of financial statements.
South African literature on the subject is limited to textbooks with detailed guidelines to assist accounting students and qualified accountants. No other discussions or guidelines could be found that are directed at the built environment professionals in general or the contractor in particular regarding the topic of recognition of cost according to formal accounting guidelines. The research on which the article is based attempted to obtain clarification on key aspects from the experts on the subject namely the registered auditors and accountants of contractors. The results of the survey indicated that they interpret AC109/IAS11 to require no other skills than general accounting abilities. It also showed that certain important terms and activities described in AC109/IAS11 are interpreted in ways that differ from how built environment professionals would interpret the same terms. From the study it became apparent that problems in construction accounting and reporting could arise due to the fact that certain guidelines and terms in AC109/IAS11 are not consistently interpreted by all involved. These apparent ambiguities will influence the recognition of costs in different phases of completion of a construction contract.