The Financial Accounting Standards Board (FASB) and The International Accounting Standards Board (IASB) (collectively, the Boards) have issued for public comment a revised Exposure Draft on revenue recognition. This follows the original Exposure Draft that was released by the Boards in June 2010. There were approximately 1,000 comment letters submitted on the original Exposure Draft, with more than 25% of the responses coming from the construction industry.
In general, the revised Exposure Draft is more favorable to the construction industry. The revised Exposure Draft is much closer to ASC 605-35 than the original Exposure Draft. ASC 605-35 was formerly known as SOP 81-1 (i.e., percentage of completion accounting), which was the primary revenue recognition standard that the construction industry has followed for the past 30 years.
There are five key steps to applying the proposed revenue recognition standards. These five steps are as follows:
- Identify the contract(s) with the customer.
- Identify the separate performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
Although these five steps are relatively unchanged from the original Exposure Draft, several key elements within these steps have changed in the revised Exposure Draft. These changes are favorable to the construction industry and include the following:
- Much more likely that a construction contract will be accounted for as a single performance obligation as opposed to multiple performance obligations under the original Exposure Draft.
- Clarifying language that allows revenue to be recognized continuously over the contract period as opposed to a point in time.
- Provides considerable guidance on the use of input and output methods in measuring progress towards completion. Input methods (i.e., cost to cost) are generally permissible, especially when output methods are difficult and costly to measure.
One issue that still needs further clarification is the recognition of revenues for uninstalled materials at the jobsite. Comments in response to the revised Exposure Draft are due by March 13, 2012. The effective date of the new standard is uncertain at this time. However, it is generally expected that the effective date for public entities would be no earlier than periods beginning on January 1, 2015. It is also generally expected that the implementation date for nonpublic entities would be one year later than the implementation date for public entities.
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