United States

Changes to revenue recognition in the construction industry

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In May 2014, the Financial Accounting Standards Board issued new revenue recognition guidance that will, upon its effective date, replace most pre-existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles (GAAP). All entities in the construction industry whose financial statements are prepared in accordance with U.S. GAAP will be affected by the new guidance. To assist in understanding how a construction contractor could be significantly affected by the new guidance, we have prepared a white paper, Changes to revenue recognition for construction contractors, in which we discuss the following topics, among others:

  • Evaluating the contract existence criteria, including assessing collectibility
  • Accounting for contract modifications, including change orders
  • Identifying promised goods or services in a contract and determining the units of account (i.e., performance obligations)
  • Measuring variable consideration, including unpriced change orders, claims, incentives and penalties
  • Identifying and accounting for a significant financing component
  • Allocating the transaction price to the performance obligations, and determining whether the transaction price allocated to a performance obligation should be recognized as revenue over time or at a point in time
  • Accounting for contract costs, including learning, start-up and mobilization costs
  • Addressing the new presentation and disclosure requirements

While the effective dates for the new guidance are staggered, they are now upon us. With limited exceptions, the new guidance was effective as of January 1, 2018 for public entities with calendar year ends. For all nonpublic entities with calendar year ends, the new guidance is effective in the year ending December 31, 2019. Time is of the essence for these entities given that implementation of the new guidance could represent a significant undertaking in many cases. Our white paper can be a valuable tool in the implementation process to help understand the application of ASC 606 to your construction contracts.

Also, for a comprehensive discussion and numerous examples of applying the new guidance, refer to our publication, A guide to revenue recognition.

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