Guidance on gradual revenue recognition for construction work

In a recent judgment, the Supreme Administrative Court (SAC) dealt with the method of accounting for revenues from construction work carried out under a contract for work. Is it possible to recognise revenues based on partial invoices issued upon the customer’s approval of the work carried out? Or should the contractor account for work in progress and only recognise revenues once the work is completed and formally delivered (handed over) to the customer, as per the Civil Code? The SAC sided with the taxpayer and agreed with the first option.

In the case in question, the tax administrator and subsequently the regional court did not accept the approach whereby a taxpayer (contractor) had their customer regularly check a construction’s progress and approve the performed work, afterwards invoicing the customer for partial completion of the work. The taxpayer then recognised the invoiced amounts as current-period revenues. The tax administrator and the regional court argued that the contract between the taxpayer and their customer did not stipulate any parts of the work that could be delivered gradually and, since the Civil Code did not provide for any such partial delivery of work, the contractor should have, in their opinion, accounted for work in progress.

The Supreme Administrative Court in its judgment No. 2 Afs 296/2020-65 sided with the taxpayer. According to the SAC, it was necessary to respect that the construction business is very specific in its long- term implementation and size of individual contracts. The court held that neither approach, i.e., the one chosen by the tax administrator nor the one adopted by the taxpayer, is contrary to accounting regulations. However, the court stressed, it is necessary to reflect the factual situation over the formal state. In this context, the SAC also referred to the statutory accounting principle that where several accounting treatments are possible, it is necessary to choose the accounting method that corresponds to the factual situation and thus gives a true and fair view.

The SAC concluded that upon its completion, the invoiced work represented an economic value for the customer as it allowed the further progress of the construction. According to the court, the contractual arrangements regarding the delivery (handover) of the work were relevant from the civil law perspective, but in no way excluded the partial approval and invoicing of work. The SAC stated that the taxpayer's approach was not contrary to the contractual arrangement. To refuse the chosen accounting treatment solely on the grounds of an absence of an explicit contractual provision on the procedure upon partial delivery (handover) of construction work would be unreasonably formalistic, the SAC held.

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