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Revenue Recognition – The New Reality for Construction Companies

April 3rd, 2012 by Bob Biehl

In June 2010, the Financial Accounting Standards Board (FASB) released an exposure draft on a new revenue recognition standard that would change the way all businesses, not just contractors recognize revenue.  The goals of the new standard were:

  • Develop a common revenue standard for industries, jurisdiction and capital markets
  • Condense 100+ rules into 1 “high quality” standard

This new standard would completely repeal SOP 81-1 the current accounting literature that contractors use as a guide for all accounting issues.  Due to the complexity of the issue and based upon approximately 1,000 comment letters to the exposure draft, 25% of which came from the construction industry, the FASB re-exposed the proposed standard for public comment.  This was a historical and extremely rare move on the part of the FASB.  The FASB heard what the construction industry was saying about significant challenges to the operability of the proposed standard, specifically:

  • Identifying separate performance obligations
  • Determining the transaction price
  • Continuous transfer of goods and services and transition

The revised exposure draft, issued in November 2011, is a lot better for the construction industry, but there still are concerns such as:

  • Contract modifications and the treatment of claim revenue recognition
  • Need for more specific guidance on use of % of completion method for revenue recognition for long-term contracts
  • Better defining and acceptance of input methods
  • Time value of money adjustments for contracts of one year or more
  • The presentation of uncollectible revenue
  • Clarification of the term “reasonably assured” in the proposal
  • Onerous (Loss) Contracts
  • Definition of Contract Costs
  • Financial Statement disclosures
  • Implementation of Standard

The comment period for the second exposure draft expired on March 13, 2012 and the comments are now being evaluated and a final standard is planned to be issued – most likely the second or third quarter of 2012.

What does all of this mean? There are changes coming to how contractors recognize revenue.  Although not as extreme of a change as originally thought when the initial exposure draft was issued in 2010, but still change.

Contractors need to be prepared for the new standard and the impact that it could have to how they do business.  Next time, I will discuss some of the specific changes in the current exposure draft vs. how contractors currently recognize revenue.

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