February 9, 2015

Article by Robert Mercado, Assurance Services Partner & James Miller, Assurance Services Sr. Manager, "New Revenue Recognition Standards Require Contractors to Think Differently," Featured in Construction Accounting and Taxation

Construction Accounting & Taxation

By Robert Mercado, Assurance Services Partner & James Miller, Assurance Services Sr. Manager

Featured Robert Mercado, Partner, Assurance

Related Industry Construction

Article by Robert Mercado, Assurance Services Partner & James Miller, Assurance Services Sr. Manager, "New Revenue Recognition Standards Require Contractors to Think Differently," Featured in Construction Accounting and Taxation

Excerpt:

After nearly 1,000 comment letter s, with 350 letters from the construction industry alone, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) published a new joint standard on revenue recognition, replacing most of the existing guidance and taking a major step toward converging Accounting Principles Generally Accepted in the United States (U.S. GAAP) and International Financial Reporting Standards (IFRS). The new standard, Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, joined the Codification of U.S. GAAP as Topic 606, effectively replacing Topic 605, with a corresponding IASB reference of IFRS 15, Revenue from Contracts with Customers.

The new requirements will affect different companies in different ways but will require all contractors to assess the extent of the impact – including extensive new disclosure requirements aimed to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, contractors will have to assess potential changes to systems and processes to collect data. The new standard moves away from the industry- and transaction- specific requirements under U.S. GAAP, which are also used by some IFRS preparers in the absence of specific IFRS guidance.

Depending on whether certain criteria are met, revenue is either recognized overtime (in a manner that depicts the contractor’s performance) or at a point in time (when control of the goods or services is transferred to the customer). Contractors will apply a five-step model to determine when to recognize revenue, and at what amount. The following list specifies that revenue should be recognized when (or as ) a contractor transfers control of goods or services to a customer at the amount to which the contractor expects to be entitled:

  1. Identify the contract with a customer.
  2. Identify performance obligations.
  3. Determine the transaction price.
  4. Allocate the transaction price.
  5. Recognize revenue.

Click here to read a PDF version of the article >>

Featured

Robert  Mercado

Robert Mercado

Partner

  • Assurance
  • New Haven, CT