3 Keys for Contractors to Navigate New Revenue Recognition Standards
Revenue recognition standards were recently updated by the Financial Accounting Standards Board, and these updates will have an impact in the construction industry. To help contractors prepare, Viewpoint recently hosted a webinar on how contractors can get ready for the new standards.
The webinar, presented by Tim Wilson, national industry partner for BKD National Construction & Real Estate Group, and Geoffrey Falk, product manager for Spectrum Construction Software, walked contractors through the details of the changes, example scenarios and practical advice for moving forward confidently.
So where should contractors start? With these three steps:
Know the Technical Standard
First, contractors need to know the timeline of the new changes and what the standard includes. Public companies needed to begin implementing the new standards for the 2018 calendar year. Nonpublic entities must begin doing so in 2019. The end of the year might sound far off, but the time to begin adjusting is now.
The standard itself includes changes in the way contractors should identify performance obligations and recognize revenues. There are five keys steps in the new process:
- Identify contract(s) with your customer.
- Identify performance obligations.
- Determine the transaction price.
- Allocate the transaction price to separate performance obligations.
- Recognize revenue when performance obligations are satisfied.
Understand the Effect on Construction Accounting
Contractors should have a good understanding of all parts of this new revenue recognition accounting process, but there’s one point in particular worth highlighting here: The way performance obligations work has changed, since now distinct goods/services must be accounted for independently. In the past, all parts of a contract were handled together once a job was finished.
This change will require that contractors plan ahead to ensure each contract has the appropriate number of performance obligations. In many cases, contractors will still have just one performance obligation for a job, but in some cases two or more performance obligations may be required.
For example, a project that involves engineering services with a separate go/no-go clause as well as construction services would have two separate performance obligations: one for the engineering, which is provided separately and has standalone value, and one for the construction services.
Additionally, it’s worth noting: Under the new standard, contracts will need to be evaluated on an ongoing basis during a project because penalties and bonuses must be accounted for when they’re likely to occur rather that at the end of a contract.
The actual procedures for recognizing revenue should be fairly familiar to contractors, though, as the same cost-to-cost-percentage-of-completion method still applies.
Create an Implementation Action Plan
Once you understand the key changes to the revenue recognition standard, it’s time to think about an implementation action plan. As we’ve discussed, the changes will definitely affect contract accounting at your business. They may also impact things like financial reporting, taxes, job costing, project management, IT procedures, legal issues and HR. Try putting together a task force to determine how the changes will touch these different issues and departments.
Contractors may also need new technology solutions to make revenue recognition easier. Now that even closer tracking of projects is required, finance and operations need to be closely connected. Transparent, integrated construction software can make it simpler to access information and stay on top of any revenue recognition tasks.
To learn more about the details of the new revenue recognition principles, watch the full “Prepare for the New Revenue Recognition Standards” webinar.