The applicability of IAS 11 construction contracts within the context of the local construction industry

Abstract

The International Accounting Standards Board (IASB) has committed itself to deliver a complete set of International Accounting Standards to facilitate the financial market integration on a worldwide scale. As a result, the recognition, measurement and disclosure requirements are harmonised so that companies active in the financial markets do not have to comply with different sets of accounting standards. One of the standards issued by the IASB is IAS 11 Construction Contracts. The objective of this industry-specific standard is to prescribe the accounting treatment of revenue and costs associated with such contracts. The method for recognising costs and revenues as recommended in the standard is 'The Percentage of Completion Method'. On the other hand, Generally Accepted Accounting Principles (GAAP) also allow another method, 'The Completed Contract Method'. This study focuses on the method most commonly used in Malta and how construction companies account for their revenue and costs in each financial year. The dissertation gives a general background on the local construction companies and evaluates whether the requirements stipulated by the standard are being complied with. It results that the most common method applied locally is the percentage of completion method and the conditions relating to this method are present in the local construction industry.