Revenue Recognition—It’s a Wrap!
Over the past several months, the FASB and IASB ("boards") have been finalizing their redeliberations on the proposed revenue recognition standard, Revenue from contracts with customers. On February 20, 2013, those redeliberations concluded. Since the reexposure of the proposed revenue standard in November 2011, the boards have reconfirmed many of their original decisions, but also changed several proposals key to the engineering and construction industry. Most in the construction industry continue to view the totality of these changes as a "win;" which is in large part due to the high level of interaction between the industry (most notably, constituents from CFMA) and the boards.
Overall, it appears that the proposed revenue recognition model will produce results similar to results from the current model for many (but not all) construction-type contracts. With that said, the following is a brief summary of the key changes impacting the industry:
- Collectibility (bad debt): The boards decided that impairments from customer receivables should be presented prominently as an expense in the statement of comprehensive income.
- Uninstalled materials and inefficient costs: The boards indicated that a final standard would include clarified language to assist in determining how uninstalled materials and inefficient costs would impact a cost-to-cost measurement model of satisfying a performance obligation over time.
- Variable consideration (claims, awards, etc.): The boards indicated that an entity should recognize revenue only up to the amount that should not be subject to significant future reversals. This constraint would be applied to the measurement of the transaction price (i.e., contract revenue); as opposed to being applied to the recognition of revenue as originally proposed in the 2010 exposure draft.
- Onerous performance obligations (loss provisions): The boards decided to remove the proposed guidance and instead retain existing guidance relating to the accounting for loss contracts.
- Transition date: The boards decided that the proposed standard will be effective for annual reporting periods beginning on or after January 1, 2017 (January 1, 2018 for non-public entities). Early application will not be permitted.
- Transition method: The boards decided that a company has two options for transition: The standard can be applied on a retrospective basis or can be applied using a practical expedient approach. The practical expedient approach would permit an entity to:
- Apply the standard to all existing contracts as of the applicable effective date (by recognizing the cumulative effect in opening retained earnings rather than restating comparative years) and to new contracts going forward; and
- Disclose and explain the impact of adoption through this practical expedient on all relevant financial statement line items in the period of adoption.
A final standard is expected to be released in the second quarter of 2013. Until a final standard is released, all decisions are considered tentative.
It is critical that you know how important your role has been, and continues to be, in the standard-setting process. Our individual and collective interactions with the boards have been frequent, and they have been substantive, allowing the boards to come to decisions that both achieve the right balance of accounting for the economics of transactions and respect the unique aspects of our industry.