Contractors: Act Now on Adoption of New Revenue Recognition Standards
By: Stephen D. Ebinger, CPA
For construction contractors, revenue is one of the most important measures used to assess a company’s performance.
Recognizing the need for improving how companies measure and report revenue, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) spent many years working together on a converged standard to replace the accounting guidance for revenue recognition. In May 2014, the two standard setters issued converging guidance on revenue in contracts with customers. In the U.S., the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The IASB’s standard was issued as IFRS 15.
Superseding virtually all existing revenue recognition guidance in U.S. GAAP, the new revenue recognition standard establishes an underlying core principle under which an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard establishes a five-step framework that entities will be required to apply in order to achieve the core principle described above.
Each of the steps in the five-step framework can impact the amount and the timing of revenue recognized. The potential impacts can vary significantly among entities.
In a poll conducted during the annual Construction Financial Management Association (CFMA) conference in June 2017, 94% of respondents indicated they are not prepared to meet the new revenue recognition standards. With the deadline to adopt the new standard on the horizon, there is an opportunity for contractors to craft and execute a thoughtful and strategic adoption plan. Accordingly, the time is now for contractors to capitalize on that opportunity to ensure they are fully prepared for implementation of the new standard, as well as the related implications its adoption may have on their businesses.
Which areas of the new revenue recognition standard will most impact contractors? Continue reading...