New Revenue Recognition Standard Affects Construction and Real Estate Companies
On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) approved the sweeping new revenue recognition standard, which creates a uniform standard for how companies report revenue from customer contracts in their financial statement. The controversial standard comes after five years of discussion, information gathering, and modification from both boards.
The standard consolidates more than 200 pieces of literature addressing revenue recognition for various industries in the United States. There were previously different revenue recognition requirements for specific transactions and industries. As a result, different industries used different accounting for economically similar transactions.
This is the first U.S. standard to adopt more of a “principles” based philosophy, meaning that it doesn’t have detailed rules to follow to determine how something will be recorded. United States accounting standards are generally more “rules” based, while international standards are more principles based.
The new standard provides more detail and adds more rigor to the existing revenue recognition requirements within international financial reporting standards (IFRS).
Under the new standard, there is a five-step process for revenue recognition:
- Identify the contract with a customer.
- Identify the separate performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the separate performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
Effect on construction and real estate industries
This standard will affect every industry, but construction and real estate industries may be more substantially impacted than other industries. The specifics of how this process will be applied to construction projects will vary depending on the type of work being performed, the contract, and numerous other factors.
The new standard includes guidance that will change how to account for the costs of obtaining a contract and the costs to fulfill a contract. In addition, enhanced disclosure requirements that require information about the nature, amount, timing, and uncertainty of revenue and cash flows will have to be provided — this is currently not required to be disclosed.
The new standard takes effect for U.S. public companies for annual reporting periods beginning after December 15, 2016. Private companies in the United States are required to apply the new standard for annual reporting periods that start after December 15, 2017, but can choose to adopt the new standard as early as December 15, 2016. Companies using IFRS must apply after January 1, 2017.
The FASB and IFRS are working on transition guidance, and the American Institute of CPAs (AICPA) is offering a webinar about the new standard on June 16. However, companies should not delay in considering the new standard and what impact it will have on its financial statements.
CLA can help you understand how these changes impact your organization, so that you can adapt to these standards and embrace the changes with confidence.