How to Apply New Revenue Recognition Rules to Your Construction Company
Revenue recognition has evolved into a complex and confusing patchwork of different rules and requirements that have been inconsistently applied and that vary widely from industry to industry. The FASB has taken a clean-slate approach and developed a principles-based approach that will be applicable to all industries.
The new standard is intended to remove inconsistencies and weaknesses in existing requirements. ASU 2014-09, Revenue from Contracts with Customers, represents one of the most significant revisions to U.S. GAAP in its history and will have a significant impact on contractors.
Simplifying the revenue recognition process
While it would seem that moving from a rules-based approach to a principles-based approach would simplify the revenue recognition process, the new guidance and supporting information released in ASU 2014-09 is more than 700 pages long.
The American Institute of Certified Public Accountants (AICPA) has created a task force to specifically address implementation issues of ASC 606 by contractors. This group will be updating the widely used audit and accounting guides for contractors, as well as providing specific implementation guidance for the industry.
White paper focuses on revenue recognition for construction contractors
Revenue and profit recognition requirements are changing, but overall, the methodology historically used by contractors will be consistent except for a few key differences in the following areas:
- Change orders and claims
- Identification of performance obligations
- Uninstalled materials
- Certain contract costs (incremental and fulfillment costs)
CLA’s white paper offers a readable summary of some of the issues that will impact the construction industry most.
What prompted this change?
This project is part of the FASB’s goal of merging U.S. GAAP with International Financial Reporting Standards (IFRS). Upon implementation, IFRS and U.S. GAAP will share the same guidance on revenue recognition.