On October 1, 2026, the Albanian National Accounting Council (KNK) issued Directive No. 18/2026 establishing mandatory accounting and financial reporting standards for the construction sector, effective for fiscal years beginning on or after January 1, 2027. This sector-specific framework addresses long-standing gaps in applying International Financial Reporting Standards (IFRS 15 “Revenue from Contracts with Customers” and IAS 11 “Construction Contracts”) to Albania’s unique contractual practices, including widespread use of advance payment guarantees, variation orders, and retention clauses. The directive applies to all entities holding construction licenses (Categories A-D) and registered technical trades (electrical, plumbing, HVAC) under Law No. 69/2012. Key provisions include: (1) mandatory use of the percentage-of-completion method based on certified cost-to-complete surveys for contracts exceeding 12 months; (2) strict separation of contract revenue into distinct performance obligations (design, procurement, construction, commissioning) with standalone selling price allocation; (3) capitalization of mobilization costs only when recoverable and amortized over contract duration; (4) recognition of variation order revenue only upon written approval and measurable progress; and (5) treatment of retention receivables as contract assets subject to expected credit loss modeling under IFRS 9. Early adoption is permitted for 2026 year-ends with disclosure.
Key Takeaways
- Percentage-of-Completion Mandate with Independent Certification: Contractors can no longer use the completed-contract method for long-term projects. Progress must be measured by independent quantity surveyors certified by the Albanian Institute of Certified Surveyors (AIKS) at each reporting date. The cost-to-cost input method is required, with output methods (milestones, surveys) allowed only when costs cannot be reliably measured. This eliminates subjective progress estimates that historically enabled profit smoothing. Surveyor fees are deductible for tax purposes per Instruction No. 5/2026.
- Performance Obligation Unbundling for Tax & Reporting Alignment: Construction contracts must be disaggregated into distinct performance obligations (e.g., design-build separated from civil works) with revenue allocated based on relative standalone selling prices. This directly impacts VAT timing as each obligation may trigger VAT at different stages. For profit tax under Law No. 29/2023, the unbundling prevents premature expense deductions on incomplete obligations. The directive provides a practical expedient: obligations representing less than 5% of contract value may be combined.
- Retention Receivables as Contract Assets with ECL Provisioning: Retention monies (typically 5-10% held for 12-24 months post-completion) are reclassified from trade receivables to contract assets. Entities must apply IFRS 9 expected credit loss (ECL) modeling using historical default rates by client type (public vs. private) and project duration. The GDT confirmed in Letter No. 442/2026 that ECL provisions are tax-deductible only when specific write-off criteria are met, creating a temporary difference requiring deferred tax asset recognition under IAS 12. This significantly impacts balance sheet leverage ratios for bonding capacity.
Disclaimer: This article is compiled and summarized by the AI based on publicly available information and is for general information purposes only. It does not constitute any form of formal tax advice, legal opinion, or basis for performance. Please consult a qualified professional tax advisor or legal counsel for tax advice.
Source: Read Official Announcement