International Accounting Standard 11

International Accounting Standard 11 (IAS 11), titled Construction Contracts, was an International Accounting Standards (IAS) issued by the International Accounting Standards Committee (IASC) and subsequently maintained by the International Accounting Standards Board (IASB). The standard prescribed the accounting treatment for revenue and costs associated with construction contracts. IAS 11 required contract revenue and contract costs to be recognized by reference to the stage of completion of contract activities when the outcome of the contract could be measured reliably. The standard formed part of the International Financial Reporting Standards (IFRS) framework until it was superseded by International Financial Reporting Standard 15 (IFRS 15), Revenue from Contracts with Customers, effective 1 January 2018.

History

IAS 11 was originally issued by the International Accounting Standards Committee in 1979 to establish accounting principles for long-term construction contracts, which often extended over multiple accounting periods.

The standard was substantially revised in 1993 to improve consistency in the recognition of contract revenue and expenses and to expand guidance on contract accounting.

Following the establishment of the International Accounting Standards Board in 2001, responsibility for IAS 11 was transferred to the IASB. In May 2014, the IASB issued International Financial Reporting Standard 15 as part of a joint convergence project with the Financial Accounting Standards Board (FASB). IFRS 15 replaced IAS 11, International Accounting Standard 18, and several related interpretations for annual reporting periods beginning on or after 1 January 2018.

Objective

The objective of IAS 11 was to prescribe the accounting treatment for revenue and costs associated with construction contracts.

The standard sought to ensure that:

contract revenue was recognized in the accounting periods during which construction work was performed;
contract costs were matched with related contract revenue;
financial statements reflected the economic substance of long-term construction activities.

Scope

IAS 11 applied to construction contracts, including contracts for:

construction of buildings;
bridges;
roads;
dams;
ships;
industrial facilities;
infrastructure projects.

The standard also applied to contracts for related services directly associated with construction activities, such as project management and architectural services, where included within the construction contract.

Construction contracts

IAS 11 distinguished between:

fixed-price contracts; and
cost-plus contracts.

Fixed-price contracts

Under a fixed-price contract, the contractor agrees to complete construction for a fixed contract price or a fixed rate per unit of output, sometimes subject to adjustment clauses.

Cost-plus contracts

Under a cost-plus contract, the contractor is reimbursed for allowable costs together with an agreed profit margin or management fee.

The accounting treatment depended on whether the contract outcome could be measured reliably.

Revenue recognition

When the outcome of a construction contract could be estimated reliably, IAS 11 required contract revenue and contract costs to be recognized using the percentage-of-completion method.

Revenue was recognized by reference to the stage of completion at the reporting date.

Methods of measuring completion included:

proportion of contract costs incurred;
surveys of work performed;
physical completion of contract activities.

Where the outcome could not be estimated reliably, revenue was recognized only to the extent of recoverable contract costs.

Contract costs

Contract costs generally included:

direct labor;
construction materials;
equipment depreciation;
subcontracting costs;
contract-specific overheads.

General administrative costs and selling expenses were generally excluded unless specifically recoverable under the contract.

Disclosure requirements

IAS 11 required entities to disclose information including:

contract revenue recognized during the period;
methods used to determine contract revenue;
methods used to determine the stage of completion;
amounts due from customers for contract work;
amounts due to customers for contract work.

These disclosures enhanced transparency regarding long-term construction activities.

Replacement by IFRS 15

IAS 11 was superseded by International Financial Reporting Standard 15, which introduced a single principles-based model for recognizing revenue from contracts with customers.

Characteristic	International Accounting Standard 11	International Financial Reporting Standard 15
Primary scope	Construction contracts	Contracts with customers across most industries
Recognition method	Percentage of completion	Transfer of control using the five-step model
Effective status	Superseded from 1 January 2018	Current IFRS standard
Revenue model	Construction-specific guidance	Unified revenue recognition framework

Although IFRS 15 replaced IAS 11, many construction contracts continue to recognize revenue over time where the IFRS 15 criteria are satisfied.

Impact

International Accounting Standard 11 established a consistent framework for accounting for long-term construction contracts under IFRS for more than three decades. By requiring revenue and contract costs to be recognized according to the progress of construction activities, the standard improved the measurement of financial performance for construction entities. Its replacement by IFRS 15 integrated construction contract accounting into a broader principles-based revenue recognition framework applicable across industries while retaining many concepts relating to revenue recognition over time.