In the July 2012 addition of the ABC Spokesman, I reported to you the new proposed revenue recognition guidance and how it will impact the construction industry. Since then, the Financial Accounting Standards Board (FASB) and interested parties in this proposed revenue recognition guidance have met to discuss this new proposed standard and to try to finalize the guidance for all industries. On February 20, 2013, the FASB and its interested parties concluded there discussions to produce what is believed to be final revenue recognition guidance. The new standard titled “Revenue From Contracts With Customers” is the outcome of these meetings and deliberations.
While the original and reissued exposure draft outlined numerous accounting changes for the construction industry, the proposed new guidance appears to provide a revenue recognition model that will produce results similar to results from the current model for many construction-type contracts. The new guidance will continue to recognize the use of percentage-of-completion accounting and other currently used accounting methods familar to those in the construction industry with some changes. Overall the final outcome of this project appears to be positive for the construction industry.
While most of the new proposed guidance is consistent with the current model, there were some changes that are different and will require additional analysis in order to meet the new standard. The following is a summary of the key changes between the new revenue recognition model and that initially proposed:
- Collectibility (bad debt): Impairments from customer receivables will need to be presented prominently as an expense in the statement of comprehensive income.
- Uninstalled materials and inefficient costs: Clarifying language will be provided to assist in determining how uninstalled materials and inefficient costs will impact a cost-to-cost measurement model of satisfying a performance obligation over time.
- Variable consideration (claims, awards, etc.): Construction entities will recognize revenue only up to the amount that should not be subject to significant future reversals. This constraint would be applied to the measurement of the transaction price (i.e., contract revenue).
- Onerous performance obligations (loss provisions): Existing guidance relating to the accounting for loss contracts will be retained.
- Transition method: A company has two options for transition (1.) Retrospective basis, or (2)
Practical expedient approach. The practical expedient approach would permit an entity to:
- Apply the standard to all existing contracts as of the applicable effective date (by recognizing the cumulative effect in opening retained earnings rather than restating comparative years) and to new contracts going forward; and
- Disclose and explain the impact of adoption through this practical expedient on all relevant financial statement line items in the period of adoption.
This proposed standard will be effective for annual reporting periods beginning on or after January 1, 2017 for public entities and delayed one year to January 1, 2018 for non-public entities. The FASB will not permit early adoption of this proposed new standard. The finalized standard is expected to be released in the second quarter of 2013.
To learn more about this new proposed standard contact the construction professionals of McKonly and Asbury, LLP.