IAS 11 : Bank accounting and construction contracts.

1.3 Bank accounting and construction contracts.

Summary

Bank accounting rarely involves construction contracts.

Bank clients may be involved in construction contracts. If so, financial analysis of their IFRS financial statements would require knowledge of IAS 11.

Most banks are heavily involved in property: their own property and that of their clients. Their clients often use property as collateral, as well as using bank funds to finance the purchase and sometimes the construction of property. As a bank’s involvement in property increases, so does the need for banks to employ their own property experts.

Concerns for Bankers

IFRS primarily concerns the economic value and profit of transactions, whilst bankers are deeply concerned about liquidity and cash flows.

Construction contracts are medium and long-term ventures. Money from the purchaser may be received at infrequent intervals. This may require the contractor to provide finance for much of the work for considerable periods of time before reimbursement, with a potential for liquidity problems arising as a result.

Regular reviews of the cash flows are needed to ensure that any slippage is quickly identified and action taken.

The contract revenue may change from one period to the next, as a result of contract variations, claims, penalties, and cost-escalation clauses. The revenue may be partly or wholly accrued and therefore not matched by cash received.

Another major concern with construction contracts is hidden losses generated by making insufficient progress, or mistakes in the early or middle stages of the contract, causing cost overruns to appear in later accounting periods.

Hidden losses may occur from costs that are believed to be rechargeable to clients that the client refuses to accept.