Builders' contract revenue now that IAS 11 has gone
How a building client measures revenue on long contracts under IFRS 15 now that IAS 11 is superseded, and how to retire the old contract schedule.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Many building contractors' files still carry a spreadsheet headed "Contract schedule": contract value, costs to date, estimated costs to complete, percentage complete, profit taken to date. It was built years ago, under IAS 11, and has been rolled forward every year since. The standard it was built for no longer exists.
IFRS 15, issued in May 2014, replaced IAS 11 Construction Contracts and IAS 18 Revenue, along with several related interpretations. For a contractor client that means revisiting both the logic and the spreadsheet.
IAS 11 is gone: retire its calculations
ACCA notes that IAS 11 was superseded by IFRS 15 and that its requirements should no longer be used to calculate contract assets and liabilities. The old schedule may still produce plausible numbers, but plausible is not the test. IFRS 15 asks different questions: what did the contractor promise, when does the customer gain control, and how is progress measured?
Do not simply relabel the old columns. Start again from the contract.
Is the contract satisfied over time?
Under IFRS 15, a performance obligation may be satisfied at a point in time, typically for promises to transfer goods, or over time, typically for services. ACCA lists the three criteria under which an obligation is satisfied over time:
- the customer simultaneously receives and consumes the benefits as the entity performs;
- the entity's performance creates or enhances an asset that the customer controls; or
- the performance creates no asset with an alternative use to the entity, and the entity has an enforceable right to payment for work completed to date.
Otherwise, ACCA explains, the obligation is satisfied at a point in time.
In construction the second and third criteria do most of the work. A contractor building on the customer's land will often meet the second, because the customer controls the building as it rises. A contractor fabricating a specialised item in its own yard, which it could sell to nobody else, has to rely on the third, and that turns on whether the contract gives an enforceable right to be paid for work done if the customer walks away. Read the termination clause. A formal building contract may answer the question; a one-page quotation signed by a homeowner may not. More detail is in over time or at a point in time.
Measuring progress
For a performance obligation satisfied over time, the IFRS Foundation states that an entity selects an appropriate measure of progress to determine how much revenue to recognise as the obligation is satisfied. ACCA explains that the stage of completion is needed to calculate revenue to date.
Common measures in construction are costs incurred as a share of total expected costs, surveys of work performed such as a quantity surveyor's valuation, and milestones reached. Whichever is chosen, it should reflect the transfer of the work to the customer. Items that do not reflect progress, such as materials delivered to site but not yet built in, or materials wasted, can distort a cost-based measure and need a hard look.
Expected losses and the onerous contract test
Here IFRS 15 departs sharply from the old schedule. ACCA explains that IFRS 15 does not require the estimated profit or loss on the contract to be calculated, except to determine whether the contract is onerous.
So the "profit taken to date" column stops driving revenue. Revenue to date comes from the measure of progress applied to the transaction price. The estimate of the contract's total outcome survives in one place only: if the contract is expected to make a loss, it must be tested as onerous, and a provision may be needed. That test is explained in onerous contracts.
Contract lines in a contractor's statements
ACCA explains that under IFRS 15 a contract asset or contract liability is calculated simply as revenue recognised to date less amounts invoiced to date. A contractor's statement of financial position therefore typically needs contract assets, contract liabilities and trade receivables on separate lines, and retentions held back by customers with their own disclosure, covered in retention receivables.
In Achekam's Financials Studio, a firm can add its own statement lines and groups and reword any row title, and later builds keep those choices. "Contract assets", "Contract liabilities" and "Retentions receivable" can each be set up as lines that still total into a standard line, so the notes and the cash flow statement stay consistent. The Studio's standard policy wording is based on IFRS for SMEs and labelled for review before issue; a contractor on full IFRS needs its own revenue policy describing the over-time assessment and the measure of progress, and staff can write it. Notes take their figures from the mapped trial balance, and anything the trial balance cannot hold, such as the method of measuring progress, is left as "[to be completed]".
Converting the old schedule
A practical path for a contractor still running an IAS 11 spreadsheet:
- List each contract and the distinct promises in it.
- Decide, for each, over time or point in time, and record why.
- Choose a measure of progress and apply it to the transaction price.
- Compare revenue to date with amounts invoiced to find the contract asset or liability.
- Estimate the total outcome only to test whether the contract is onerous.
- Keep the old schedule on file as history, but stop using its profit column.
ACCA's article on contract assets and contract liabilities explains the balances that arise when revenue is recognised before or after the customer pays, and why IAS 11's calculations no longer apply.
The new schedule will often look simpler than the old one. That is not a loss of rigour; it is IFRS 15 putting the effort where it belongs, on the contract terms and the evidence of progress.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
