Accounting of Construction Contracts
Compared with the production and marketing cycles of other industrial sectors, construction is a
long-term business since the execution of building contracts often extends over multiple accounting
dates. Construction contracts that have not been settled yet are accounted for on the balance sheet
according to the Percentage of Completion (PoC) method based on the construction costs plus the
corresponding percentage of the profits realized according to the performance progress. Impending
losses from construction contracts that have not been settled yet must be accounted for immediately
when they are perceived, i.e. at the end of the current fiscal year.
If the contracts exhibit a positive balance after offsetting the installment payments received
from the client, then they must be listed under trade receivables from PoC.
If the installment payments received from the client exceed the trade receivables from PoC, then the balance must be listed under Liabilities to PoC. A netting of receivables and liabilities from different construction contracts is not allowable.
