Contractors will only be able to report revenues once they pass “control” of a project to their clients, under new accounting rules to be set out this week.
The rules have prompted concern from companies including Balfour Beatty and Morgan Sindall.
The International Accounting Standards Board is set to release the latest draft of the new rules, after lengthy consultation with the industry. The body is revising accounting rules as part of a project to standardise financial reporting across the globe.
The new rules mean that a project’s revenues can only be put on a company’s books once control has passed to the client.
Currently, construction companies tend to book revenues according to a payment schedule, adjusting according to what has been delivered.
The IASB believes the new rules do not differ hugely from that process, and additionally will help investors to understand better what elements of major projects are more profitable than others.
Under the proposals, contractors will divide projects into segments, known as “individual performance obligations”. Once each of these is completed, the revenues from it can be booked.
The new rules envisage that although a project like the Forth Bridge might take years to complete, parts of it will effectively have been handed to the client at an earlier stage.
If one “performance obligation” on a contract is a low-margin aspect of the job, it will show in the accounts, while the premium aspects will show as separate performance obligations.
The changes are prompting questions as to when control effectively passes to a client.
Using the Forth Bridge example, one source said: “The customer would own the river bank, and own the design. It can’t move around, it must go there, [so the contractor does not ‘own’ the bridge].”
Contractors wrote to the IASB to outline concerns last year. A letter - signed by the finance directors of Balfour Beatty, Carillion, Costain, Galliford Try, Interserve, John Laing, Kier, Laing O’Rourke, Morgan Sindall, Rok and Serco - said that the new rules might mean information on current trading being delayed.
“Deferring revenue until construction is complete will cause significant ‘grossing up’ of the balance sheet, which may give investors, lenders and other users of financial statements a misleading picture of working capital employed in a business,” it said.
Fiona McDermott, sector head for building and construction at KPMG, said: “There’s an optimism that the rules will be moderated somewhat.”
The latest rules, known as an Exposure Draft, are out this week. Contractors have until October to comment. The rules will be in place in June 2011, but it is not yet known when they will become mandatory.