Italy: New rules on the accounting of construction contracts

Previously, the only accounting method for tax purposes for short-term contracts – those planned to be completed within 12 months or less and involving two financial years, at most – was the Completed Contract method. This method allows profit recognition only upon completion and acceptance of the project, thus entailing (1) accounting for inventories at the cost of production, and (2) profit recognition in the financial year in which the contract is completed.

For long-term contracts – those planned to be completed beyond 12 months and involving two or more financial years – the only acceptable accounting method for tax purposes was the Percentage-of-Completion method. This method requires revenue and cost recognition in proportion to the stage of completion of contract activity.

​Unlike the Completed Contract method, this approach allows for the accounting of inventories based on revenue and costs accrued during the project according to the stage of completion, thereby recognizing part of the contract margin in the financial years in which the work is carried out.

From an accounting standpoint, however, the situation was different. Accounting Standard OIC 23 (implementing Article 2426, paragraph 1, no. 9 and 11 of the Italian Civil Code) regarded (and still regards) both the Completed-Contract and the Percentage-of-Completion methods as viable options when accounting for construction contracts, specifically:

Following the changes in legislation, the Percentage-of-Completion-Method is now acceptable for tax purposes for short-term construction contracts, and the Completed Contract method is acceptable for long-term construction contracts. According to Article 13, paragraph 1, of Legislative Decree No. 192/2024, the changes will be effective starting from the fiscal year following the one in progress as of December 31st, 2023 (i.e., fiscal year 2024 for companies with a calendar fiscal year).

For the sake of completeness, it is worth mentioning that contracts still in progress as of the end of 2023 will continue to be subject to the rules in force prior to the legislative changes.

An interesting implication of these changes involves an additional requirement for tax purposes regarding long-term construction contracts. Previous regulations required taxpayers to prepare a list of construction contracts in place at the end of the fiscal year, detailing the applicable contract, general information about clients and their place of residence, due dates, information regarding the accounting treatment as well as a reference to the relevant general ledger accounts used. Since this list is no longer referenced in the new text or in the instructions to the Corporate Tax returns (REDDITI SC 2025), it is safe to presume that taxpayers no longer need to prepare and retain this document. However, out of prudence, we recommend making a case-by-case assessment to determine whether the elimination of the schedule is appropriate, so as to mitigate the potential for any risk or dispute with the tax authorities.​