Contracts would need to be separated into a series of separate performance obligations, with allocations of contract price, separate accounting costs incurred to date and estimates for total anticipated contract costs and related costs to complete for each. The new standards would require a much more detailed level of analysis to be performed, on a contract-by-contract basis. Contractors would likely be required to conduct the following for each contract:

- Identify the contract and each separate performance obligation
- Allocate the appropriate profit margins to identified performance obligations
- Monitor revenue and costs for each performance obligation
- Provide disclosures related to the amount, timing and uncertainty of revenue on contracts

While FASB is making an effort to create a single-revenue recognition standard for International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles, the new proposal has several pitfalls:

1. Under the new proposal, multiple parts of a contract will be presented separately in the financial statements. Sureties view contracts in their entirety; therefore, they analyze each job from start to finish in order to determine whether the overall job was profitable or not. Whether one portion of the job generates a 10% profit and another portion generates 5% is not critical or valuable information for a surety. It would be very difficult for sureties and lenders to analyze multiple profit reports for the same job and try to combine them together. This would most likely require additional manpower, technology and expenses.

2. Revenue recognition under the new method is very subjective, thus increasing uncertainty for lenders, sureties and other users of the financial statements. Under the new method, two accounting firms could come up with different conclusions about the amount that has been recognized. This could negatively affect the amount of bonding capacity and credit given to the contractors since there is no certainty about the amounts presented in the financial statements. As a result, contractors may need to scale back their operations due to reductions in lines of credit and bonding capacity. Conversely, the percentage of completion method diminishes these concerns.

3. The new method would create an unnecessary burden on all contractors since it would require contractors to purchase and implement new accounting software. Contractors will require more help from certified public accountants in conforming with the new rules, especially since the new standards require retrospective application and are very confusing. The additional involvement of CPAs would create added expenses for contractors, many of whom are already struggling in today's economy.

4. The goal of financial statements is to provide the reader with valuable information in a standardized format for the purpose of making financial decisions. It is uncertain whether the new standards will provide the users with anything more valuable than what the current percentage of completion method provides. Without any added value, the new standards would only create confusion and extra costs.

While the anticipated effective date for these proposed requirements is unknown at this time, the new standards are expected to be finalized sometime in 2011. If the provisions within the exposure draft are adopted, they will significantly impact the way revenue is recognized for construction contracts.