IAS 11
Superseded
Construction Contracts
Accounting for construction contracts using the percentage-of-completion method, including stage-of-completion measurement, expected loss recognition, and contract combining/segmentting. Superseded by IFRS 15 Revenue from Contracts with Customers.
Superseded Standard
IAS 11 was withdrawn and replaced by IFRS 15 Revenue from Contracts with Customers, effective for periods beginning on or after 1 January 2018.
It is retained here for historical reference and because its percentage-of-completion logic underpins IFRS 15's over-time revenue recognition model. For current construction contract accounting, always apply IFRS 15.
Current Standard
IFRS 15 Revenue from Contracts with Customers 1
Conceptual Framework Linkage
Why revenue was recognised before completion
For contracts spanning multiple reporting periods, waiting until final delivery to recognise any revenue would badly misrepresent an entity's performance in the interim periods – the Conceptual Framework's relevance objective favours reflecting economic activity as it happens, not bunching it all into one period.
HOW IAS 11 MAPPED TO THE FRAMEWORK'S ELEMENTS
Income recognition – recognised progressively as the contract activity is performed (an early form of "over time" recognition later formalised by IFRS 15) Matching – contract costs were expensed in the same period as the related revenue they helped generate, preserving the matching concept Prudence – expected losses were recognised immediately in full, not spread across the contract
IAS 11's percentage-of-completion method was philosophically the direct ancestor of IFRS 15's "recognise revenue over time" criteria – the underlying economic logic did not disappear with the standard's withdrawal, it was absorbed into a broader, principles-based framework.
Measurement principles applied by IAS 11
IAS 11 measured revenue by reference to the stage of completion of the contract activity at the reporting date – a form of current-progress measurement rather than a completed-transaction measurement.
Framework basisUsed by IAS 11 for…
Historical costContract costs incurred to date
Progress-based allocationRevenue recognised each period, proportional to stage of completion
Qualitative characteristics in action: percentage-of-completion prioritised relevance – but only when outcome could be estimated reliably; otherwise the standard fell back to a cost-recovery approach, favouring faithful representation over premature profit recognition.
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Scope & Applicability (Historical)
What IAS 11 covered
IAS 11 applied to accounting for construction contracts in the financial statements of contractors – a contract specifically negotiated for the construction of an asset or combination of assets closely interrelated in terms of design, technology, function, or purpose.
TYPICAL CONTRACT TYPES
Contracts for the construction of a single asset (e.g. a bridge, building, dam, pipeline) or a number of assets closely interrelated as a single project (e.g. a refinery); also contracts for rendering services directly related to construction, such as project management and architectural services, and contracts for asset destruction/restoration and environmental restoration following demolition.
This scope, and its underlying "over time" recognition logic, is now embedded within IFRS 15's general five-step model (Section 11) rather than existing as a separate standard.
Key definitions you must know
Construction contract
A contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology, and function, or their ultimate purpose or use.
Fixed price contract
A construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, sometimes subject to cost escalation clauses.
Cost plus contract
A construction contract in which the contractor is reimbursed for allowable/defined costs, plus a percentage of these costs or a fixed fee.
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Recognition – The Percentage of Completion Method
The reliability threshold and recognition mechanics
When the outcome of a construction contract could be estimated reliably, contract revenue and contract costs were recognised as revenue and expenses respectively by reference to the stage of completion at the reporting date.
Fixed price contracts – reliable estimate required
Total contract revenue measurable reliably; probable economic benefits will flow; contract costs to complete and stage of completion at year end can be measured reliably; costs attributable can be clearly identified and measured reliably.
Cost plus contracts – a lower bar
Probable economic benefits will flow; costs attributable, whether or not specifically reimbursable, can be clearly identified and measured reliably – no need to estimate total contract revenue in advance.
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Contract Revenue & Contract Costs (with worked example)
Components of contract revenue and costs
CONTRACT REVENUE COMPRISED
The initial amount of revenue agreed in the contract Variations, claims, and incentive payments, to the extent probable they'll result in revenue and are reliably measurable
CONTRACT COSTS COMPRISED
Costs directly related to the specific contract (site labour, materials, depreciation of construction plant, design/technical assistance costs) Costs attributable to contract activity in general, allocable to the contract on a systematic and rational basis (insurance, construction overheads) Other costs specifically chargeable to the customer under the contract terms
Worked example – cost-basis percentage of completion
Example 1: Three-year construction contract
A fixed-price contract has a total contract price of $10,000,000. Estimated total costs are $8,000,000. By the end of Year 1, costs incurred to date are $2,000,000, with reasonable confidence the outcome can be estimated reliably.
Stage of completion = 2,000,000 ÷ 8,000,000 = 25%
Revenue recognised, Year 1 = 25% × 10,000,000 = $2,500,000
Costs recognised, Year 1 = $2,000,000 (actual costs incurred, matched to revenue)
Gross profit recognised, Year 1 = 2,500,000 − 2,000,000 = $500,000
Revenue recognised, Year 1 = 25% × 10,000,000 = $2,500,000
Costs recognised, Year 1 = $2,000,000 (actual costs incurred, matched to revenue)
Gross profit recognised, Year 1 = 2,500,000 − 2,000,000 = $500,000
This same cost-to-cost input method remains a common technique for measuring progress under IFRS 15's "over time" recognition model.
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Stage of Completion – Measurement Methods
The three permitted methods
MethodBasis
Cost-to-costCosts incurred to date ÷ Estimated total contract costs (the most common approach – used in Example 1 above)
Surveys of work performedIndependent professional assessment (e.g. quantity surveyor) of the physical proportion of work completed
Physical completionCompletion of a physical proportion of the contract work, measured in units of output (e.g. kilometres of road built)
Progress payments and advances received from customers often do not reflect the actual work performed and are explicitly excluded from stage-of-completion measurement under any of the three methods.
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Expected Losses – Immediate Recognition
The prudence override
When it is probable total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately, in full – regardless of how much work has been completed
This applied regardless of whether work had commenced, the stage of completion, or the amount of profit expected on other contracts – a strict, contract-by-contract prudence rule.
Worked example – onerous contract
Example 2: Expected loss recognised in full
A contract has a fixed price of $5,000,000. Due to unexpected cost overruns, total estimated costs are now $5,600,000. Costs incurred to date represent 30% of the revised total estimated costs.
Total expected loss = 5,000,000 − 5,600,000 = $(600,000)
The full $600,000 loss is recognised immediately in the current period – not just 30% of it. Revenue for the period is still recognised based on the 30% stage of completion, but total costs recognised are increased to ensure the full loss appears in the current period's result.
The full $600,000 loss is recognised immediately in the current period – not just 30% of it. Revenue for the period is still recognised based on the 30% stage of completion, but total costs recognised are increased to ensure the full loss appears in the current period's result.
This immediate full-loss recognition rule carries directly through into IFRS 15/IAS 37's treatment of onerous contracts today.
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Treatment When the Outcome Cannot Be Estimated Reliably
Cost-recovery (zero-profit) approach
When the outcome of a construction contract could not be estimated reliably (common in early stages of a contract), revenue was recognised only to the extent of contract costs incurred that were probable of recovery, and contract costs were expensed in the period incurred – meaning no profit was recognised until reliable estimation became possible.
Example 3: Early-stage contract, outcome not yet reliable
A new, complex contract has incurred $400,000 of costs by year end, all of which are expected to be recoverable, but management cannot yet reliably estimate total contract revenue or total costs due to significant unresolved technical uncertainties.
Revenue recognised = $400,000 (equal to recoverable costs incurred – a "zero margin" approach)
Costs recognised = $400,000
Profit recognised = $0, even though real profit may ultimately be earned once the contract outcome becomes clear
Costs recognised = $400,000
Profit recognised = $0, even though real profit may ultimately be earned once the contract outcome becomes clear
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Combining & Segmenting Contracts
Segmenting a single contract
Construction of each asset was treated as a separate contract when: separate proposals were submitted for each asset; each asset was subject to separate negotiation and could be accepted/rejected separately; and the costs/revenues of each asset could be identified.
Combining multiple contracts
A group of contracts (with one or more customers) was treated as a single contract when: the group was negotiated as a single package; the contracts were so closely interrelated they were, in effect, part of a single project with an overall profit margin; and the contracts were performed concurrently or in a continuous sequence.
This combining/segmenting logic maps closely to IFRS 15's contract combination and performance obligation identification criteria (Section 11).
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Disclosure Requirements (Historical)
Required disclosures
GENERAL DISCLOSURES
Amount of contract revenue recognised as revenue in the period Methods used to determine contract revenue recognised, and the stage of completion of contracts in progress
CONTRACTS IN PROGRESS AT YEAR END
Aggregate costs incurred and recognised profits (less recognised losses) to date Advances received, and retentions Gross amount due from/to customers for contract work, presented as an asset/liability
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Critical Judgments & Estimates (Historical)
Where management judgement mattered most
SIGNIFICANT JUDGEMENTS
Whether the outcome of a contract could genuinely be estimated "reliably" Whether contracts should be combined or segmented Which stage-of-completion method best reflected the pattern of work performed
SIGNIFICANT ESTIMATES
Total estimated contract costs and revenue, including variations and claims Costs to complete, reviewed and revised (as a change in accounting estimate under IAS 8) at each reporting date
These same judgement areas persist under IFRS 15's over-time recognition model – the specific standard changed in 2018, but the underlying estimation challenges of long-term contract accounting did not disappear.
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IAS 11 vs IFRS 15 – What Changed
Comparison – the transition from IAS 11 to IFRS 15
FeatureIAS 11 (superseded)IFRS 15 (current)
Core modelPercentage of completion for construction contracts specificallyFive-step model applied to all revenue contracts; construction is just one application of "recognise over time" criteria
Recognition triggerStage of completion, given a reliable estimateSatisfaction of a performance obligation, either over time (3 specific criteria) or at a point in time
Reliable-estimate fallbackCost-recovery / zero-profit approachSimilar concept – revenue recognised only to the extent costs incurred are expected to be recoverable, when progress cannot be reasonably measured
Contract combining/segmentingOwn separate criteriaNow embedded within IFRS 15's contract combination and distinct performance obligation identification (Steps 1–2)
Variable consideration (claims, incentives)Included if probable and reliably measurableGoverned by IFRS 15's variable consideration constraint – "highly probable" no significant reversal
IFRS 15 did not abandon percentage-of-completion logic – it generalised it into the "over time" recognition criteria that apply across all industries, not just construction, while adding more prescriptive guidance on variable consideration and contract modifications.
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Statement Mapping – Where Every Contract Event Landed
Comprehensive event-to-statement mapping table (historical, under IAS 11)
Event / transactionStatement(s) affectedNotes
Contract costs incurredSOFPAccumulated as "costs incurred on contracts" pending matching to revenue
Revenue recognised per stage of completionSOPLRecognised progressively across the contract's life
Costs matched to revenue recognisedSOPLExpensed in the same period as the related revenue
Expected loss identifiedSOPLFull loss recognised immediately, regardless of completion stage
Gross amount due from customersSOFPAsset – costs plus recognised profit exceeds progress billings
Gross amount due to customersSOFPLiability – progress billings exceed costs plus recognised profit
Progress billings and advances receivedCash Flow StatementOperating activities inflow
Stage-of-completion method, contract totalsNotesMandatory disclosure
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Related Standards – Cross-Reference Map
How IAS 11's legacy connects across the IFRS body of literature
StandardNature of the connection
IFRS 15The direct successor standard – absorbed and generalised IAS 11's percentage-of-completion logic into its "recognise revenue over time" criteria
IAS 2Construction work in progress is excluded from IAS 2's scope specifically because it is (now) governed by IFRS 15's contract asset/liability model instead
IAS 37Onerous construction contracts, where unavoidable costs exceed expected benefits, are now assessed under IAS 37's onerous contract provisions rather than IAS 11's standalone expected-loss rule
IAS 23Borrowing costs directly attributable to a qualifying construction contract asset may still be capitalised, a rule that survived the transition to IFRS 15 largely unchanged
IAS 8Revisions to estimated total contract costs/revenue are treated as changes in accounting estimate, applied prospectively – a principle carried forward unchanged into IFRS 15 practice
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Quick-Reference Glossary
Retentions
Amounts of progress billings not paid until satisfaction of conditions specified in the contract for their payment, or until defects have been rectified.
Progress billings
Amounts billed for work performed on a contract, whether or not paid by the customer.
Advances
Amounts received by the contractor before the related work is performed.
Variation
An instruction by the customer for a change in the scope of work to be performed under the contract.
Claim
An amount the contractor seeks to collect from the customer/other party as reimbursement for costs not included in the contract price (e.g. customer-caused delays, errors in specifications).
Incentive payment
Additional amounts payable to the contractor if specified performance standards are met or exceeded.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows