Action Needed on Revenue Recognition

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Contact

Jeff Shoaf
Senior Executive Director
Government & Public Affairs
Associated General Contractors of America
2300 Wilson Boulevard, Suite 400
Arlington, VA 22201
USA
Phone: (202) 547-3350
Fax: (703) 837-5407
http://www.agc.org

Proposed Accounting Changes for Revenue Recognition Rules Would Significantly Affect Contractors

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have released a draft Accounting Standards Update to create a single revenue recognition standard across multiple industries, including construction.  The new standard could have significant impacts on construction contractors, including increased administrative costs and effects on surety credit.  By introducing considerable subjectivity into the process, the new standard also will open the door to financial manipulation leading to less consistency and transparency in the financial reporting process in the industry.

Proposed Revenue Recognition Changes In Brief:

  • Revenue from a project would be recognized as multiple “performance obligations,” with the contract price allocated among them.
  • Each performance obligation is an economic unit of measure, meaning some obligations on the same project could carry losses, while others carry profit.
  • Some performance obligations might not qualify for percentage-of-completion accounting.  Currently, percentage-of-completion accounting applies to the entire contract.
  • Guidance is provided on how to split a job into performance obligations, but there is no set formula.
  • Change orders might be considered new performance obligations.  Currently, change orders adjust the entire contract.

Action Needed:

AGC, in conjunction with the Construction Financial Management Association (CFMA), has prepared the following summary of key discussion points and sample letter language which can be incorporated by you in your own letter to the FASB.  Your letter should be written based upon your own views and circumstances and should articulate the specific thoughts on the proposed revenue recognition standard.  The sample letter is not a form letter, and as such, you should not take the body of this letter language and copy it onto your own letterhead and send it directly to the FASB.  Please consider the unique points you wish to make, but in that process, this tool can significantly expedite the development of your own letter.

For More Information:

If you need help in getting up to speed on this topic or would like to hear a refresher on how the standard is expected to apply to the construction industry, please go to the AGC Webinar or the CFMA KnowledgeNOW Webinar for an archived version of our associations’ revenue recognition webinars.

Still more information, including links to FASB’s revenue recognition proposal and previous comment letters can be found here.