< Back to Thought Leadership

The New Revenue Recognition Guidance: Key Points To Consider

Update published on June 5, 2020: FASB issued Accounting Standards Update (ASU) 2020-05, Revenue from Contracts with Customers (ASC 606) and Leases (ASC 842) Effective Dates for Certain Entities, as part of its efforts to support and assist stakeholders as they cope with the many challenges and hardships related to the COVID-19 pandemic.

Over three years have passed since the Financial Accounting Standards Board (FASB) issued its landmark revenue recognition guidance. Despite that time lag, many contractors have not yet started to seriously consider implementation steps. While it is true that accounting for revenue under the percentage of completion method is still permissible for most contracts under the new guidance, there are still factors to consider for every contractor who is required to prepare financial statements under U.S. generally accepted accounting principles (GAAP).

What are the key points of which all contractors should be aware?

  • Implementation dates of the new guidance:
    • Non-public entities: years beginning after December 15, 2018 (calendar year 2019)
    • Public entities: years beginning after December 15, 2017 (calendar year 2018)An agreement does not qualify as a contract (and therefore may not be considered for revenue recognition) unless collection of amounts due from the customer is probable. This is different from current GAAP, which requires that collection must be “reasonably assured.” Collection focuses on a customer’s ability and intent to pay, and if there are changes in circumstances during the life of the contract, the contract will have to be reassessed. Such a reassessment could impact recognition of revenue on future goods and services to be transferred.
  • The new standard introduces the concept of a “performance obligation,” which is a promise to transfer a good or service that is distinct, or a series of distinct goods and services, to the customer. Going forward, the performance obligation – not the contract – is the unit of measurement for revenue recognition.
  • Distinct performance obligations require separate revenue recognition. Generally, a construction contract will be one performance obligation, as it involves interrelated goods and services provided by the contractor, and the risk of performing under one obligation is inseparable from the risk of performing under others. Said differently, a contract requires multiple inputs (design, coordination, plumbing, electric, etc.) to get the one output (a newly-constructed or renovated manufacturing facility).
  • The new standard also introduces the concept of “variable consideration,” which includes claims, penalty or incentive provisions, change orders for which pricing hasn’t been determined, etc. Variable consideration may be included in the transaction price (ie: “contract value,” in today’s terms) if it is probable that a significant reversal will not occur upon resolution of the uncertainty. An entity must elect whether to use the expected value or most likely amount methods in determining the amount of variable consideration to consider in calculating revenue. A general rule of thumb is that “probable” means that the outcome has a 70-80% chance of occurring. Variable consideration will need to be assessed at each reporting period.
  • Revenue that is recognized as an entity satisfies a performance obligation may be calculated based on output methods (for example, cube yards of pavement laid) or input methods (for example, cost to cost percentage of completion). The method selected must align with the terms of the underlying contract, ie: based on when control, as defined, is transferred to the customer.
  • There are two transition options for implementation:
    • Full retrospective method, by which an entity adjusts its prior-year financial statement balances in the year of implementation.
    • Modified retrospective method, by which the cumulative effect of retrospective application is recorded at initial adoption.

The above just highlights the various considerations in implementing the revenue recognition guidance. There are many more factors, and each will need to be assessed for your company’s specific contracts. Please give us a call to discuss how the revenue recognition guidance affects your company.

Employer Tax Credits for Providing Paid Sick and Family Leave Related to COVID-19

The American Rescue Plan Act, enacted March 11, 2021, aims to deliver economic relief to families and workers. On April 21, President Biden announced a provision of the American Rescue Plan Act that allows eligible employers to claim refundable tax credits for providing emergency paid sick leave to employees who take time off for reasons […]

Learn More
Charity Reimbursement

Charity Reimbursement: Protecting it from Audit Scrutiny

There is a new audit trend coming down the pipeline that could impact your charity reimbursement for Medicare bad debt. In the past there was no enforcement of statements being sent to a charity patient before they were deemed indigent. Until a patient has been approved for charity, they are still deemed non-indigent. Auditors are […]

Learn More

HIPAA and Covered Entities

Anyone who works in the healthcare industry knows that their organization takes steps to protect patient health information under a series of guidelines known as HIPAA. There are several provisions to HIPAA that require organizations to use Federal guidelines to ensure digital health information is secure. Those provisions include: Privacy Rule Security Rule Enforcement Rule […]

Learn More