Revenue Recognition Update and The Impact to the Construction Community

Late in 2011, the Financial Accounting Standards Board (FASB) re-issued an exposure draft of their proposed changes on how revenue will be recognized for all businesses going forward. The following is a summary of these proposed changes and the impact to construction and construction related companies.

 

1. The implementation timeframe of proposed changes to revenue recognition is targeted for  between Q4 2012 and Q1 2013.
2. FASB reiterated that once the new exposure draft becomes final, all previously existing industry guidance will be eliminated – including existing guidance for the construction industry. Therefore, industry-specific guidance around how to account for claims, unapproved change orders, and even the methods of calculating percentage of completion will be eliminated.
3. FASB indicates that they are not eliminating percentage of completion accounting, but with the industry guidance that is going to be eliminated (as mentioned above), the prescribed methods for calculating percentage of completion accounting will be eliminated. This will allow construction entities to have opportunities to use other methods for calculating percentage of completion. However, this may lead to greater diversity of practice over time.
4. FASB reiterated that specific guidance has been written with the construction industry in mind. More specifically, this guidance will allow for most typical construction projects to be accounted for as a single performance obligation. The specific guidance as currently written in the new exposure draft is:
   • A good or service is distinct if either of the following criteria is met:
     • The entity regularly sells the good or service seperately
     • The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. Readily available resources are goods or services that are sold separately (by the entity or by another entity) or resources that the customer already has obtained (from the entity or from other transactions or events).
   • Notwithstanding the requirements above, a good or service in a bundle of promised goods or services is not distinct and, therefore, the entity shall account for the bundle as a single performance obligation if both of the following criteria are met:
     • The goods or services in the bundle are highly interrelated and transferring them to the customer requires that the entity also provide a significant service of integrating the goods or services into the combined item(s) for which the customer has contracted.
     • The bundle of goods or services is significantly modified or customized to fulfill the contract.

These proposed changes are sure to have a significant impact on all construction companies and construction related entities. The potential changes in percentage of completion accounting will not only have an impact on prepared audit, reviewed and compilation reports for bonding purposes but could have potential impacts on tax. Obtaining the advice of a seasoned construction accounting and tax professional in advance will help to eliminate any potential surprises that this new guidance may have on your construction business.

To learn more about this new guidance and to contact an accounting professional seasoned in the construction industry, please contact the construction professionals of McKonly & Asbury, LLP.