On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers.
This significant undertaking – which resulted from a joint task force between the FASB and the International Accounting Standards Boards (IASB) – affects every entity across all industries.
So what does ASU 2014-09 mean for construction contractors?
The new standard provides five steps to revenue recognition:
- Identify the contract with customers.
- Identify the performance obligations within each contract.
- Determine the contract price.
- Allocate the contract price to each of the performance obligations.
- Recognize contract revenue when (or as) the performance obligations are satisfied.
While many of these steps may already seem commonplace for most construction entities, the FASB has added new guidelines and criteria for each of these steps. The following are just a few examples of these guidelines.
- What constitutes a contract;
- What performance obligations are and the qualities that make them distinct;
- The factors to consider when determining the contract price;
- Methods of allocating the contract price to the performance obligations; and
- How to determine if revenue should be recognized at a point in time or over the life of the contract.
These specific guidelines may change the way many contractors structure their contracts with customers.
Other items highly relevant to construction contractors that may be affected upon adoption of ASU 2014-09 include:
- Accounting for change orders;
- Accounting for retainages and mobilization costs;
- Revenue recognition for uninstalled materials;
- Financial statement disclosure requirements.
Some of these changes are likely to affect the ratios and metrics that are used to evaluate construction entities.
Your future with 2014-09
This standard is effective for annual reporting periods beginning after December 15, 2017 for public entities and certain other entities, and December 15, 2018 for all other entities.
The application of the standard is retrospective, and the FASB has provided two methods by which to apply the standard – the full retrospective approach or a modified approach. Businesses will need to determine which method best suits their needs.
While this new standard represents a fundamental change in how businesses recognize revenue, early planning can help ease the burden of transition.
Extensive review of current contract bidding and accounting practices, as well as identifying new documentation and data-compiling methods, can help avoid problems as your business implements the new standard.