By: Joseph F. Kessler
While in the public’s eye since May of 2014, the Financial Accounting Standards Board (FASB) new standard for recognizing revenue goes into effect for private contractors on December 15, 2019.
Some privately owned contractors have already started to implement the new requirements but many have not.
There are five critical steps that need to be taken to achieve compliance:
1. Identify the Contract and the Customer
2. Identify the Performance Obligations in the Contract
3. Determine the Transaction Price
4. Allocate the Transaction Price to each Obligation
5. Recognize Revenue when each Obligation is satisfied.
Contractors may need to “Bundle up”– Meaning that if they perform multiple roles, for example as general contractor and special trade subcontractor for one client on one project, – for accounting purposes these services and related income are combined.
Change Orders, Bonuses and Liquidated Damages are now “variable considerations” accounted for separately which will change when this revenue can be recognized based upon the likelihood of be paid. Retainage cannot be treated as a Receivable. Mobilization costs previously recognized when received are amortized over the life of the contract.
Unused and Defective materials are now treated as “waste” and not “contractor cost” and has to have its own line item. Uninstalled Materials create another issue. Previously it was simple – recognition occurred when materials were delivered. New rules add complexity to the analysis.
The new FASB standards will require changes in IT platforms for both the contractor and their accountants as well as education as to how the new/changed information needs to be populated; however if there is a silver lining for the private contractors, it is that publicly traded contractors are required to comply in December 2018.
The new FASB standard have to be understood by contractor’s lenders as financial statements will look differently and loan covenants may require revisions.