Many people enjoy watching DIY shows where homes in disrepair are transformed from shabby to chic in less than an hour. If only the real world worked the same as DIY TV. Firms would be able to get clients implementing revenue recognition during advertisement breaks for hardware stores and home decor
Sadly, that’s not the case. Now that we’re in 2019, the Financial Accounting Standards Board’s (FASB) new revenue standard is no longer an event on the distant horizon for nonpublic entities. It’s now front and center. The new revenue standard is applicable to all industries, however some are expected to be more significantly affected than others. One of these industries is construction.
While the effect can vary from entity to entity, here are 10 key items to consider if you work in construction or serve construction clients:
The criteria for recognizing revenue is changing. While most in the industry will likely meet the over-time criteria, you can’t assume you will just because you did in the past. If you don’t meet the criteria, then revenue should be recognized at a point in time.
Measuring progress on a contract using an input method such as cost-to-cost may require adjustments for costs that do not represent the transfer of goods or services to a customer (i.e. rework, waste, mobilization costs, uninstalled materials).
Accounting for change orders and modifications look different. Key determinations include whether modifications add distinct goods or services and if they’re priced at their standalone prices.
Performance obligations must be capable of being distinct AND distinct within the context of the contract. This determination requires careful consideration of what the customer is ultimately buying.
Is the contractor a principal or an agent? To answer this, consider whether the individual is being engaged to provide a service (principal) or to arrange for someone else to provide a service (agent).
Variable consideration (e.g., penalties, bonuses) likely will be recognized much earlier than under legacy guidance; however, evaluation of the likelihood of a reversal is required (concept of a constraint).
Noncash consideration (equipment, materials or labor) used in fulfillment of a contract is included in the transaction price if the contractor obtains control over the noncash consideration provided.
Consideration of whether long-term agreements include a significant financing component is also required.
Cancellation terms may have a material impact on when and how much revenue can be recognized.
Guidance for customer-provided materials, uninstalled materials, costs to obtain a contract, set-up and mobilization costs and bid costs has been addressed by the new standard as well.
To help ensure that implementation of the standard isn’t a flop for our members, the Center for Plain English Accounting developed a suite of resources on revenue recognition. Those resources include individual reports on aspects of the standard, archived webcasts, contract review checklists, onsite training and industry-specific resources such as our two-part report on the construction industry. This report is usually available exclusively to Center for Plain English Accounting members, but we have unlocked part one temporarily so that anyone can access it. You’ll also want to mark your calendars for the AICPA Construction & Real Estate Conference, taking place Dec. 5-6, 2019, in Nashville, TN.
Practitioners need answers to their difficult A&A questions. The Center for Plain English Accounting is here to help. Make sure your firm has access to top-notch A&A advice by joining the Center for Plain English Accounting.