Revenue Recognition Standards Finalized
A new accounting pronouncement that will affect the construction industry and how companies recognize revenue has been finalized and will be effective in 2017 for public companies and 2018 for private companies. Unlike the previous standard that was specifically written for the construction industry, the new standard, Revenue from Contracts with Customers, is general and applicable for all industries. This standard has been developed jointly between the governing boards responsible for US Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS).
The differences between the new standards and the current standards are fundamental, which are based on core principles rather than specific rules. However, based on strong and sustained input from construction industry stakeholders over last five years, the new standards retains the most of the logic inherent in the current standards, which has served the industry for over 30 years.
Contractors who report revenue on the percentage of completion method, cost to cost approach, will be required to change their accounting processes. Changes will be subtle, but will likely result in more deferral of revenue in the early stages of contracts than under the current standards. We expect accounting software providers will help in this effort by revising their job cost and financial reporting packages. Finally, contractors will be required to provide more robust disclosures on their contracts in process, including descriptions of payment terms, how their contract obligations will be satisfied, and how the company accounts for warranty costs, among other items.
EisnerAmper professionals have been following the deliberations for many years and are available to help you with the transition. To check out an analysis of the new standards, check out our Real Estate Taxation article from earlier this year.