|FASB Proposes Changes to
Contract Revenue Recognition
Warning: There is trouble on the horizon regarding revenue recognition for long term contracts. On June 24th the Financial Accounting Standards Board (FASB) published Proposed Accounting Standards Update Revenue Recognition: Revenue from Contracts with Customers. This proposed standard is designed to make sweeping changes to how contractors recognize revenue and profits on contracts in progress. This standard would completely supersede current guidance, upon which current percentage-of-completion accounting is based. This standard, as designed, would have particularly large impact on contracts which span more than one reporting period. This proposal was issued in conjunction with an International Accounting Standards Board (IASB) exposure draft, and appears to be another step in the convergence of US and international accounting standards.
What does this mean? While the proposal is still in its infancy, it appears likely that some form of it will become GAAP within the near future, perhaps as early as 2012. The major changes included in this standard are:
- A shift from percentage-of-completion accounting on contracts to a method that more closely resembles completed-contract accounting. The recognition of revenue would occur at distinct milestones during a contract's life, known as "performance obligations" as they are satisfied.
- A requirement for entities to report the amount, timing, and uncertainty of revenue and cash flows arising from contracts to provide goods and services to customers.
- A mandate that significant information concerning contracts with customers would have to be disclosed, focusing on outstanding performance obligations.
In summary, the accounting for construction contracts is poised to take a large turn away from the methods and systems that have been in place for the last three decades. Berntson Porter & Company will stay tuned to this proposal and keep our clients informed as to its outcomes and impacts as we understand them further.
For more information please contact Rhett Ennis, CPA, MAcc at email@example.com, or 425-289-7639.