- Identify its contracts with customers,
- Identify the separate performance obligations in a contract,
- Determine the transaction price of the contract,
- Allocate the transaction price to the separate performance obligations, and
- Recognize revenue when (or as) the entity satisfies the performance obligations.
- Performance Obligations – contracts are to be broken out into separate performance obligations.
- Cost to Cost – this method will be allowed as an input method in recognizing revenue when performance obligations are satisfied over time.
- As a contractor satisfies a performance obligation over time, the ability to recognize revenue under cost to cost will allow the contractor to continue to account for revenue under a path similar to the percentage of completion method used today, if it is determined that the contract has only one performance obligation.
- Uninstalled Materials – there will now be certain situations in which an entity may recognize revenue in an amount equal to the cost of uninstalled materials.
- Incremental Costs to Acquire a Contract – such as employee commissions, may need to be capitalized and amortized as performance obligations are satisfied.
- Costs to Fulfill a Contract – such as mobilization costs, may need to be capitalized and amortized as performance obligations are satisfied.
- Penalties – a contractor must estimate the probability of contract penalties when considering transaction price; penalties may lower revenue until they become probable of not occurring.
As construction owners and executives, now is the time to communicate with your business partners and plan for these changes in your financial reporting. Some considerations include:
- Bank covenants may need to be re-examined,
- Bonding capacity formulas may need to be discussed,
- Tax consequences (book/tax differences and revenue apportionment, etc.) should be understood,
- Information technology and software solutions may need to be enhanced as to their contract management, accounting and reporting modules.
About the Author
Matt Bishop is a manager in Katz, Sapper & Miller’s Audit and Assurance Services Department and a member of the firm's Construction Services Group. Matt supervises audits and reviews of financial statements, oversees tax return preparation, and advises clients in accounting, reporting, compliance, internal control and other matters. Connect with him on LinkedIn.