Bartering agreements in the maltese contruction industry and their financial and legal implications

Abstract

Purpose. The objective of this dissertation was to primarily attain a better understanding regarding the evolvement of bartering within the construction industry. Secondly, the study identifies how barter transactions affect firms in terms of legal and fiscal aspects, liquidity implications and financial reporting issues. It also looks into the advantages and disadvantages of such a practice, as identified by firms. Design. Twelve local construction firms were selected for the purpose of this study. Semi structured interviews were conducted among twelve directors one of each selected firm, and eight accountants of the respective organisations. A small questionnaire was also presented to the respondents to fill in, to identify the pros and cons of bartering. Findings. It transpires that the majority of the construction firms actually do undertake barter transaction in conduct of their business. However, it is customers who approach firms to part exchange goods/services due to the high construction costs and the unfavourable real estate market. Furthermore, bartering is believed to lead to a number of negative implications, namely liquidity and tax implications since property cannot be easily liquidated in a timely manner to sustain the firms' cash operating cycle. To combat such challenging effects, firms then seek to share the burden among their supplier by negotiating barter dealings with respect to raw materials. Conclusion. Although, barter exchanges have certain adverse effects namely liquidity implications, building contractors have to inevitably every now and then accept some kind of barter dealings which goes far beyond their profit margins so as to maintain a steady rate of incoming projects to keep their production capacity at level, and maintain major customers. Implications. It is clear that all companies are reluctant to engage in bartering transactions, given a number of adverse effects on the firms' financial health. However, although acknowledging that it might not always be in the best interest of the organisation, the majority of directors still adopt quite an aggressive strategy towards barter negotiations.