How will revenue recognition changes affect your organization? This question has been causing excitement, anxiety, and confusion across all industries – especially the construction industry.
Leading up to the release of the new standard, there were many myths and assumptions circling the accounting profession regarding the changes that the new standard would reveal. Will we have to completely change our recognition method or mentality? Will we have difficulty implementing the new standards? How soon will we have to change? Let’s explore some common myths to determine if they are true or false.
Myth: Revenue will no longer be measured using the percentage of completion method.
False: While careful assessment will need to be made, it is likely that revenue recognition will be the same or similar to current methods.
Myth: The cost-to-cost method for assessing revenue recognition on contracts can still be used.
True: A method for recognizing revenue, as control is transferred, needs to be established if a performance obligation is determined to be “satisfied over time.” Cost-to-cost is an example of an input method that may be utilized.
Myth: All contracts will have multiple performance obligations, requiring separate revenue recognition consideration.
False: Although your contract may have different aspects (i.e. design and build), it is likely that the services will be considered as a bundle. Judgment and assessment will be necessary. Ask yourself the following: are these goods/services highly dependent on other goods/services within the contract? Does the contract provide for the services to be integrated? Does the good/service significantly modify another good/service in the contract? A positive response to these questions indicates a single performance obligation.
Myth: The new standard will cause my financial statements to look different.
True: The standard will likely cause expanded footnote disclosures, both qualitative and quantitative information. In addition, earnings and costs in excess of billings on the face of the balance sheet will now be referred to as contract assets and liabilities.
Myth: The new revenue standard will be difficult to apply to existing contracts.
False: The new standard goes into effect for nonpublic entities for reporting periods beginning after December 15, 2017. Early adoption is permitted; however, no earlier than periods beginning after December 15, 2016. At the time of adoption, organizations can choose to adopt retrospectively or using a simplified approach. The simplified approach must be disclosed within the financial statements and will entail a three step process.
Although your organization may not experience significant changes, consideration and judgment needs to be given to the new revenue recognition standard. For further implementation guidance please contact your MKS&H representative.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs.