1. The New Revenue Recognition
Standard – and the Potential Impacts
on the Construction Industry
By: Billy R. Robinson, CPA
Director
brobinson@BEcpas.com
(540) 434-6736
2. Agenda
• Why change the standards?
• Facts and Myths
• What does it say?
• What does it mean?
• Transition
• What should you do now?
• Questions
3. Why change the standards?
• Converge US GAAP and IFRS (although this is now less
important than when the project began)
• Standardize revenue recognition reporting across
industries and entities
• Condense numerous standards into one complete and
understandable standard – eliminates significant amount
of industry-specific guidance in GAAP today
▫ Principles vs. rules based
• Better application of the matching principal
4. Facts and Myth
• Percentage completion eliminated
▫ False – While the thought process and terminology will
be different, revenue recognized may be similar to the
method used today
• Revenue recognition allowed on uninstalled
materials
▫ True – There is specific language where contractors
may be allowed to recognize revenue equal to the cost
of the uninstalled materials if the customer obtains
control of the goods
5. Facts and Myth
• All contracts will have multiple performance obligations
▫ False – many (not all) contracts will have one performance
obligation. Contractors will still need to evaluate each
contract for difference performance obligations and
document conclusions
• Contractors will have to recalculate all completed
contracts under the new standard when implemented
▫ False – can either restate prior periods presented, or
account for contracts in progress and all new contracts
going forward
6. Facts and Myth
• Cost to cost can still be used to determine
percentage complete
▫ True – new standard allows for the use of input or
output methods to determine percentage
complete
• There will be significantly more footnotes in the
FS
▫ Depends – New disclosures will be required with
some relief for nonpublic entities
7. What does it say?
After over 1,000 comment letters from the original
exposure draft of which over 350 was from the
construction industry – new standard issued 5/28/14.
Core Principal
Recognize revenue
▫ in a manner that matches the transfer of goods or
services to customers
▫ in an amount that reflects the consideration the
entity expects to receive in exchange for those
goods or services
8. What does it say?
Five Step Process
Step 1
• Identify the contract(s) with a customer
Step 2
• Identify the performance obligations in the contract
Step 3
• Determine the transaction price
Step 4
• Allocate the transaction price to the performance obligations in the
contract
Step 5
• Recognize revenue when (or as) you satisfy a performance
obligation
9. What does it say?
• This is very similar to percentage completion
method in use today
• You may apply the standard to a group of contracts
with similar characteristics rather than to individual
contracts if it does not materially change the
financial statements
10. Step 1
• Identify the contract(s) with a customer
• Contract
▫ An agreement with consideration between two or more
parties that creates enforceable rights and obligations
▫ Must have:
Both parties approval
Identified payment terms
Substance and enforceable rights
Probable collectability
11. Combination of Contracts
• If multiple contracts are entered into with the same
customer at the same time, they should be combined
and accounted for together as one contract if one of
these is true:
▫ They are negotiated as a package with one objective
▫ Payment for one contract depends on the price or
performance of another
▫ The goods/services in the contracts are a single
performance obligation
12. Change Orders
• Account for as a separate contract if:
▫ Scope increases as the addition of goods/services are distinct and,
▫ Price of contract increases by your standalone selling price of
additional goods/services provided
• Account for as termination of current contract and creation of new
contract if:
▫ Remaining goods/services are distinct from goods/services
transferred before contract modification
• Account for as modification of existing contract if:
▫ Remaining goods/services are not distinct
13. Change Orders
• Unpriced Change Orders
▫ If parties have approved a change in the scope, but have
not yet determined the corresponding change in price, the
entity should estimate the change to the contract as
variable consideration
▫ You will estimate the price based on a probability-weighted
or most likely amount approach provided that it is probable.
• Most change orders will not be accounted for as a
separate contract due to –
▫ Change orders generally don’t provide “distinct” goods or
services as they are usually interrelated to the original
contract
▫ Change orders are typically based on the goal of obtaining
one commercial objective for the overall contract.
14. Step 2
• Identify the performance obligations in the contract
• Performance Obligations
▫ A promise to transfer a good or service
• If there are multiple promises, they should be accounted
for as separate performance obligations if they are
distinct
15. Step 2
• Distinct
▫ The customer is able to obtain a benefit and the promise is
separately identifiable from other promises
▫ Nondistinct items should be bundled together until they are
distinct
• Most construction contracts will have just one performance
obligation
▫ A customer cannot benefit from a partially completed building; not
until the entire package is completed does it provide a benefit to
the customer
16. Step 3
• Determine the transaction price
• Transaction Price: The amount of consideration
(payment) to which an entity expects to receive in
exchange for transferring the goods or services
• Assume the contract will not be renewed, modified, or
cancelled
• More complex when it comes to possible awards or
incentive payments – if they are probable, they should
be included in the transaction price from the beginning
17. Variable Consideration
• Due to discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses,
penalties, etc.
• Use the most likely value or probability-weight the
expected value; whichever is most accurate
• Refund Liability
▫ Must be recognized if you expect to refund some (or all)
consideration received from customer
18. Time Value of Money
• Time Value of Money: A dollar today is not the same as a
dollar a year from now (likely not a big impact)
▫ Must be considered if the project is to extend beyond one
year and there is a significant financing component to the
contract (retainage not considered here)
▫ Adjust for time value of money so that revenue is
recognized at an amount that matches what you would
have received if consideration had been paid when
goods/services were transferred to customer
19. Other considerations
• Noncash Consideration – Customer-furnished materials
▫ Measure at fair value and include in contract revenue, or if that is
not possible, at the standalone selling price for the good/service
rendered or transferred
• Payments to a customer
▫ Credit, coupons, vouchers; these should reduce the transaction
price
• Claims
▫ Accounted for as variable consideration using the expected value
or most likely amount approach provided that collection is
probable
20. Step 4
• Allocate the transaction price to the performance
obligations in the contract. (will require judgment)
• If there is more than one performance obligation in a
contract, allocate in an amount that matches the
consideration you would receive for meeting that
obligation independently
• Allocate variable consideration or discounts to the
related performance obligations rather than to the entire
contract
21. Step 4
• It is a separate performance obligation if it is distinct,
meaning –
▫ The customer can benefit from the good or service either
on its own or together with other resources that are
readily available to them; and,
▫ The entity’s promise to transfer the good or service to the
customer is separable from other promises in the
contract
• This is more significant if things such as engineering,
procurement, construction or design/build are included in
contracts
22. Step 4
• Determine/estimate standalone selling price at contract inception for
each performance obligation and allocate revenues based on
relative standalone selling price
▫ Standalone selling price is price at which good/service would be
sold separately to a customer; this is not necessarily the price
stated in the contract
▫ Allocate any subsequent changes in price on the same basis as
at inception
▫ If standalone information not available, it should be estimated
using a reasonable method. Cost plus normal margin for
example
• Amounts allocated to a satisfied performance obligation should be
recognized as revenue (or a reduction of revenue) in the period in
which the transaction price changes
23. Allocation Example
• Performance Obligation 1
▫ Build a power plant
▫ Standalone Selling Price: $100m
• Performance Obligation 2
▫ Build nearby command center
▫ Standalone Selling Price: $50m
• Transaction Price: $125m
▫ Allocated to power plant: $83m (2/3rd)
▫ Allocated to command center: $42m (1/3rd)
24. Step 5
• Recognize revenue when (or as) you satisfy a
performance obligation
• Performance obligation is satisfied when
▫ The good/service is transferred to the customer
▫ The customer obtains control of the good/service
25. Step 5
• If a good/service is transferred over time, recognize
revenue over time
▫ If the customer receives and uses benefits from your work
while you perform
▫ You create/enhance an asset (work in process) while the
customer controls the asset being created/enhanced
▫ Your performance doesn’t create an asset with an alternative
use to you, and you have an enforceable right to payment for
performance completed to date
26. Step 5
• If performance obligation is not satisfied over time,
recognize revenue at a point in time when
▫ You have a right to payment for the asset,
▫ The customer has title, physical possession, and the
risks/rewards of ownership of the asset, AND
▫ The customer has accepted risk
27. Measuring Progress
• Output Methods
▫ Recognize revenue on basis direct measurement of value of goods/services
transferred to date relative to total goods/services promised
▫ Appraisal of results to date, units delivered, etc.
• Input Methods
▫ Recognize revenue on basis of efforts to the completion of a performance
obligation
▫ Hours expended, costs incurred, etc.
▫ Exclude inputs that do not contribute to entity’s progress in meeting performance
obligation or costs that are not proportionate to progress (uninstalled materials)
• Method must accurately depict true progress and hopefully is
contemplated in the contract itself
28. Costs of obtaining contract
• Costs incurred to obtain contract that would not have
been incurred if contract not obtained (e.g. sales
commission)
• Recognize as asset if expect to recover costs
▫ May expense if amortization is less than a year
• Costs incurred despite whether contract obtained are
expensed regardless of whether contract obtained or not
29. Costs of fulfilling a contract
• Recognize costs incurred to fulfill a contract as an asset only
if:
▫ Relate directly to a contract that is specifically identifiable
▫ Generate/enhance resources of the entity that will be used in
meeting performance obligations in the future
▫ Are expected to be recovered
• If within scope of another topic (e.g. inventory), look to
that guidance first
• Should be amortized and evaluated for impairment
30. Warranties
• If warranty is purchased separately, warranty is
distinct and therefore a separate performance
obligation
• If not purchased separately, account for using
existing guidance on warranties
31. Disclosures
• Contracts with customers
▫ Revenue/impairments recognized
▫ Disaggregation of revenue
▫ No real change in reporting of over/under billings
• Significant judgments and changes in judgments
▫ Over time or point in time recognition
▫ Used to determine transaction price and allocation
• Assets recognized from the costs to obtain or fulfill a contract
• Relief for nonpublic entities
32. Transition
• Public Entities
▫ Periods beginning after 12/15/16
• Nonpublic Entities
▫ Periods beginning after 12/15/17 – generally calendar year
2018
▫ May adopt as early as 12/15/16, but no earlier
• Applies to all contracts with customers
▫ Other than those covered by other standards, such as leases,
insurance, financing arrangement, financial instruments, and
guarantees
33. Transition
• Have two options during transition period
▫ May restate prior periods (retrospective
application) or
▫ May apply new standard only to new contracts
going forward and continue to apply current
standards to previous contracts
Must show a cumulative effect adjustment and
additional disclosures
34. What should you do now?
• Companies should begin evaluating the impact
on –
▫ Current business activities, including contract
negotiations
▫ Key metrics (debt covenants, surety, pre-qual)
▫ Taxes
▫ Budgeting
▫ Controls and processes,
▫ IT requirements
