Download Identifying Performance Obligations

How the New Proposed Revenue
Recognition Standard Specifically
Applies to Contractors
David LaRosa, CPA, CGMA, CCIFP
CBIZ MHM, LLC | Director
&
Mayer Hoffman McCann P.C. | Shareholder
David A. LaRosa, CPA, CCIFP
Shareholder, Mayer Hoffman McCann P.C.
Director, CBIZ MHM, LLC
With twenty years of experience in public accounting, including seventeen in construction accounting, Mr. LaRosa
is a licensed CPA in Pennsylvania & New Jersey who practices public accounting through Mayer Hoffman McCann
P.C. (MHM), an independent CPA firm. Mr. LaRosa is a Director in the Accounting group of CBIZ MHM, LLC.
Based in Plymouth Meeting, Mr. LaRosa manages accounting and audit engagements for real estate developers,
construction contractors, manufacturing companies, and employee benefit plans. Mr. LaRosa has passed the AICPA
International Financial Reporting Standards (IFRS) certification and has taught various accounting topics locally and
nationally for MHM.
Along with his audit experience, Mr. LaRosa worked as an outsourced controller for a ten million dollar
construction company performing all duties such as human resources, payroll, billing, payables and cash
management. In addition, Mr. LaRosa has assisted construction clients with the preparation of their prequalification
reports and internal cost accounting.
Among his clients are concrete, electrical, excavating contractors, and general building construction firms as well as
military and chemical companies.
A graduate of Loyola University in Maryland with a Bachelor of Business Administration in Accounting, Mr.
LaRosa is an active member of the Construction Financial Management Association (CFMA); Associated Builders
and Contractors (ABC); Suburban Contractors Association (SCA); American Institute of Certified Public
Accountants (AICPA) and the Pennsylvania Institute of Certified Public Accountants (PICPA).
Mr. LaRosa is a member of ABC’s education committee.
Effective Date
• In April 2015, the FASB issued for public comment a proposed Accounting
Standards Update (ASU), Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date, which would defer the effective date of
its new revenue recognition standard by one year. At today’s meeting, the
FASB voted to approve this deferral.
• The final ASU would permit public organizations to apply the new revenue
standard to annual reporting periods beginning after December 15, 2017.
Nonpublic organizations would be permitted to apply the new revenue
standard to annual reporting periods beginning after December 15, 2018.
• Earlier application is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that
reporting period.
Core Revenue Recognition Steps
1. Identify contract with the customer
2. Identify separate performance obligations in the contract
3. Determine the transaction price
4. Allocate transaction price to performance obligations
5. Recognize revenue as performance obligations are satisfied
Unit of Measurement
• Primary
– Contract
– Combined Contracts
• Modifications to the Contract(s)
– Only 1 Under/Over-billing per contract presented on balance sheet
• Secondary
– Performance Obligation
– Series of Performance Obligations
Contract with Customer
• Definition of “Contract”
– An agreement between two or more parties that creates
enforceable rights and obligations
• May be implied or written
• Includes subsequent modifications
– Unless modification is determined to be a new contract
• Typical industry modifications
– Change orders (approved and unapproved), field directives,
liquidated damages, equitable adjustments, claims, follow-on
contracts, etc.
Combining Contracts
• 2 or more contracts entered into at or near the same time with the
same customer ( or related parties) if one of the following conditions
is met:
– The contracts are negotiated as a package with a single
commercial objective
– The amount of consideration to be paid in one contract depends
on the price or performance of the other contract
– The goods or services promised are a single performance
obligation
• ASU 2014-09 requires applicable contracts to be combined. Current
GAAP, combining of contracts is optional.
Modification is Separate Contract
• An entity shall account for a contract modification as a
separate contract if both of the following conditions are
met:
– The scope of the contract increases because the modification
results in the addition of promised goods or services that are
DISTINCT, and
– The price of the contract increases by an amount of consideration
that reflects the entity’s STANDALONE SELLING PRICES of the
additional promised goods and services and any appropriate
adjustment to the price to reflect the circumstances of the
particular contract.
• The construction industry lacks observable standalone pricing data
Performance Obligation
• Definition of “Performance Obligation”
• A PROMISE in a contract with a customer to transfer a
good or service to the customer
• Typical construction contracts contain a number of
PROMISES – creates a possibility of multiple
Performance Obligations
Identifying Performance Obligations
• FASB Exposure Draft - Proposed Accounting Standard
Update – Identifying Performance Obligations and
Licensing
– Issued May 12, 2015
– Comments Due June 30, 2015
• This presentation includes elements of the proposed update – where
relevant presented in blue print.
When Do Performance Obligations Rise to a
Unit of Measurement
• A promise or group of promises become a separate
performance obligation - the unit of measurement - when
it is DISTINCT.
We Must Understand “DISTINCT”
• A promised good or service is considered DISTINCT if both of these conditions are
met:
– The customer can benefit from the good or service either on its own or together
with other resources that are readily available to the customer (that is the good or
service is capable of being distinct)
• This assessment requires judgment by the contractor and its auditor to
understand the customer’s business and capabilities
– A specialty contractor’s customer is usually a general contractor
– The entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract (that is, the promise to transfer the
good or service is distinct within the context of the contract)
• Exposure Draft on Identifying Performance Obligations adds that a promise is
not considered distinct unless it is material in the context of the contract.
We Must Understand “DISTINCT”
• The new standard concept of DISTINCT is similar to
current standard concept of DELIVERABLES
– A contract that has multiple deliverables has an increased
likelihood of containing multiple separate performance obligations.
We Must Understand “DISTINCT”
• Bundle of good or services
– A good or service is not distinct in the context of the contract if the
entity provides a significant service of integrating the goods or
services into the bundle of goods or services that the customer
has contracted for (Combined Output).
• The customer has contracted with a general contractor for a
building
– All of the cost components must be integrated to produce the
building
» Therefore, the combined output is a single performance
obligation.
We Must Understand “DISTINCT”
• Significant Modifying or Customizing
– A good or service is not distinct in the context of the contract if it
significantly modifies or customizes another good or service
promised in the contract.
• A specialty contractor has contracted with a general contractor
for the electrical service and wiring of a building
– The electrical services significantly alter the nature of the
materials used to perform the promises in the subcontract.
» Therefore, electrical contractor has a single performance
obligation.
» This does not mean the GC has to treat the
electrical subcontract as distinct in its contract
with the customer
We Must Understand “DISTINCT”
• Highly Dependent or Interrelated
– A good or service is not distinct in the context of the contract if it is
highly dependent on, or highly interrelated with, other goods or
services promised in the contract.
• A general contractor has contracted with a specialty contractor
for the electrical service and wiring of a building
– The electrical panel and switching is highly interrelated with
the electrical wiring.
» Therefore, there is a single performance obligation.
We Must Understand “DISTINCT”
• Combining (Bundling)
– If a good or service is not distinct, an entity shall
combine that good or service with other promised
goods or services until it identifies a bundle of goods or
services that is distinct.
• In the majority of cases, typical construction
contracts will result in all of the promises being
combined (or bundled) and the single performance
obligation will result in revenue recognition at the
contract level – consistent with current practice.
• However, each contract must be evaluated
Identifying Performance Obligations
• When – At Contract Inception
• How – Assess promises in a contract and identify as a
performance obligation each promise to transfer to the
customer that is either:
– A good or service (or bundle) that is distinct
– A SERIES of distinct goods or services that has the same pattern
of transfer to the customer
Criteria for Series – Same Pattern of
Transfer
• Each distinct good or service in the series that the entity
promises to transfer to the customer would meet the criteria
in paragraph 606-10-25-27 to be a performance obligation
satisfied over time (as opposed to satisfied at a point in
time), AND
• In accordance with paragraphs 606-10-25-31 through 32,
the same method would be used to measure the entity’s
progress toward complete satisfaction of the performance
obligations to transfer each distinct good or service in the
series to the customer.
– Using cost to cost to measure progress on all performance
obligations would satisfy this requirement.
Series of Performance Obligations
• Electrical contractor enters into a contract with a
franchisee to retrofit multiple stores with a standard
security system.
– Each store system is capable of being distinct.
– Stores are completed at different times and transfer of control to
the customer is done over time.
– Each store has the same pattern of transfer to the customer.
• All stores can be combined under the “series” doctrine and treated as
a single performance obligation.
Series of Performance Obligations
• Electrical contractor enters into a contract with a franchisee to
retrofit each store with a standard security system.
– Alternative fact pattern
• Contractor assists in the design of the system
• Contract requires performance and integration of various activities by the
Contractor such as scheduling, procurement of materials, deliveries,
identifying and managing subcontractors, expediting equipment,
supervision and performance of installation, testing, etc.
• Stores are completed at different times and transfer of control to the
customer is done over time.
• Each store is capable of being distinct
– Highly integrated nature of the entity’s performance of its activities means that a
change in one of the activities has a significant effect on other activities such that
the stores are highly interrelated and highly interdependent.
» Therefore, the entity accounts for all goods and services in the contract (all stores) as a
single performance obligation (not a series)
Series of Performance Obligations
• Series concept does not exist in current GAAP
• Entities are required to follow the series concept when it
is applicable.
• Consider the series concept when a contract has multiple
deliverables to potentially arrive at a single unit of
measurement.
Series of Performance Obligations
• ED has no expanded discussion of “series”.
• However – Question 1: Paragraphs 606-10-25-14(b)
through 25-15 include guidance on accounting for a
series of distinct goods or services as a single
performance obligation. Should the Board change this
requirement to an optional practical expedient? What
would be the potential consequences of the series
guidance being optional?
Recap – How to Have a Single
Performance Obligation
• Contract contains only 1 promise - RARE
• If promises in the contract are not distinct – entity must
bundle promises into a single performance obligation (a
contract can have more than 1 bundle)
• Promises are distinct – entity must assess if series concept
applies and report as a single performance obligation
• Concurrently delivered distinct goods or services that have
the same pattern of transfer if the outcome is the same as
accounting for the goods and services as individual
performance obligations
Now it Gets Complicated
• Variable consideration –
– Allocated to a bundle of non-distinct promises
– Allocated only to applicable units in a series of distinct promises
• Contract modifications –
– Cumulative effect adjustment if a bundle of non-distinct promises
– Prospective to future units if a series of distinct promises
• Changes in transaction price after a contract modification
– Cumulative effect adjustment if a bundle of non-distinct promises
– Prospective to future units if a series of distinct promises
BC27 – Exposure Draft - Identifying Performance
Obligations
The Board intends to convey that an entity should
evaluate whether the contract is to deliver (a) multiple
goods or services or (b) a combined item or items that is
comprised of the individual goods or services promised
in the contract. That is, the analysis should evaluate
whether the multiple promised goods or services in the
contract are outputs or, instead, are inputs to a
combined item (or items).
Not a Bundle – Not a Series
• Multiple Performance Obligation Potential in the
Construction Industry
– Contracts that provide both services and product
• Design/Build contracts
• EPC contracts
– IDIQ contracts
– Add-on/Follow-on contracts and modifications
– Contracts with separate deliverables – particularly different type of
deliverables
Uninstalled Materials – Zero Profit
Carve Out
• The standard redefines the nature of uninstalled materials
that an entity must take into consideration when
measuring progress under the cost to cost method
• It also revises the way revenue is measured throughout
the term of the contract.
Characteristics of Uninstalled
Materials
• The good is not distinct
• The customer is expected to obtain control of the good
significantly before receiving services related to the good
• The cost of the transferred good is significant relative to
the total expected costs to completely satisfy the
performance obligation.
• The entity procures the good from a third party and is not
significantly involved in designing and manufacturing the
good.
Operation of Uninstalled Materials
• When – At inception, the entity expects all the conditions to be met
• Measure of significant – relation of uninstalled materials to total estimated costs of the performance
obligation.
• How to report –
– Allocate transaction price equal to cost of uninstalled materials
– Recognize material costs as cost of performance as incurred and control is transferred to the
customer
– Recognize revenue equal to material costs recognized (zero profit method
• When services are rendered and materials are integrated into the performance obligation –
– No change in recognition or reporting
• The materials never enter into the recognition of the cost to cost measure for the
performance obligation
• The performance obligation transaction price (excluding the transaction price allocated to the
uninstalled materials) is recognized throughout the performance based on cost to cost method
using all other direct and indirect costs.
– Since no gross profit ever attaches to uninstalled materials, 100% of gross profit is recognized
as the other costs related to the performance obligation are incurred and transferred to the
customer.
Potential Uninstalled Material
Transactions
• Power contractor engaged to construct a $750 million cogeneration facility procures $300 million turbines from GE
and pays $150 million deposit
– Note that under current GAAP, this cost would qualify as a job
cost under the cost to cost method
• The cost of uninstalled materials specifically produced, fabricated, or
constructed for a project should be included in the costs used to
measure extent of progress.
Potential Uninstalled Material
Transactions
• Plumbing and piping contractor purchases $100,000
(100% of the materials) needed for a $250,000 contract
and delivers goods to storage units at the job site. The
contract provides that the contractor can bill for
uninstalled materials
– In some jurisdictions, this material might qualify as inventory that
could be held on the books of the specialty contractor rather than
a job cost
• Concept of control does not tie directly to either billing or possession –
could be a bill and hold agreement
– Consider rights and obligations under law including lien rights and
termination rights
Potential Uninstalled Material
Transactions
• Heavy contractor contract includes construction of large span
bridge. Long-lead time for supply and fabrication of steel
requires purchase long before the product is needed for
installation at the job site. Company does not design and
manufacture the steel.
• What if entity is structural steel entity. Under the contract the
entity is required to purchase steel, create shop drawings and
modify design for any identified conflicts, fabricate steel, and
deliver and install at the job site.
– Since entity is involved in the design and manufacturing, the
uninstalled materials do not meet the conditions and the full costs
would qualify to be used in the cost to cost measurement of the
performance
Potential Uninstalled Material
Transactions
• Plumbing contractor assesses risk of copper price
increases during the planned duration of a contract and
decides to pre-order all of the copper products for the
project. PO is issued to supplier identifying project and
owner. Costs are charged to the project job costs.
Uninstalled Material Good News &
Questions
• Good news – since the determination of significant uninstalled
materials is required at the beginning of the job, costs are job costs,
and revenue is recognized equal to costs, there is no financial
reporting or audit requirement for measuring the amount of
uninstalled materials at each reporting period.
• Questions– What if there is an unexpected early shipment of materials received by the
contractor after the job starts?
– Does this apply to a general contractor who agrees to pay the structural
contractor for its uninstalled materials ordered prior to commencement of
construction?
• Both the structural contractor and the GC account for the same uninstalled
materials?
– Note that the GC might argue that the structural uninstalled materials are not significant
to its total contract costs whereas they would be significant to the structural contractor.
Example #1
F.D.P. CONTRACTORS
Contract details
• Scope of Work
– Framing, drywall & paint
• Construction of interior walls and finishes for a single
structure
• Furnish all labor and furnish, supply and install all
equipment, materials and supplies
–
–
–
–
–
10” 12 ga framing
3 3/8” 28 ga wall furring
Framed platform, steps and double layer of ½” plywood
Fire treated plywood where called for
Paint, prime base and glossy finish paint
Contract details
• Bid estimate:
– 10” 12 ga framing =
$755,000
– 3 3/8” 28 ga wall furring (drywall) =
$415,000
– Framed platform, steps and double
layer of ½”
plywood = Incl.
– Fire treated plywood = Incl.
– Paint, prime base and glossy finish paint = $250,000
– Mobilization = incl.
• Total contract:
$1,420,000
Do separate performance obligations exist?
What promises in the contract are distinct, if any?
Yes No
• Distinct (both)
– Utility
• Customer can benefit from the services?
– Separately Identifiable
• No significant integration service provided?
• The goods and services are not interdependent, or interrelated?
• The goods and services are not significantly modified, or
customized?
• Series (both)
– Are the goods and services substantially the same?
– Do the goods and services have the same pattern of
transfer?
Do separate performance obligations exist?
What promises in the contract are distinct, if any?
Yes
No
• Distinct (both)
– Utility
• Customer can benefit from the services?
– Separately Identifiable
• No significant integration service provided?
• The goods and services are not interdependent, or interrelated?
• The goods and services are not significantly modified, or
customized?
• Series (both)
– Are the goods and services substantially the same?
– Do the goods and services have the same pattern of
transfer?
Conclusion – Keys
• Single performance obligation
• A significant integration service is provided –
– The finished product specified by the customer does not exist
without all 3 components – framing, drywall and paint
• The components are highly interrelated/ interdependent
– Drywall cannot exist without the framing
– Painting and texturing cannot be complete without the drywall and
framing
– Framing design is modified based on drywall requirements and
drywall installation is modified based on painting requirements
– The absence of any element results in an incomplete product
Conclusion – What if…
• …the contract called for construction of interior walls and
finishes for 5 separate structures?
• …the contract called for construction of interior walls and
finishes for 5 separate structures and…
– …framing was separately contracted, and…
– …drywall was separately contracted, and…
– …painting and texturing was separately contracted?
How many performance obligation would you have?
Example #2
FREEWAY REST AREA REHAB
CONTRACTORS
Contract details
• Rehab/refurbish rest areas on I-10
– Near Blythe and Quartzsite, Arizona
– Eastbound and westbound services at each site
– Structures, underground utilities, ramps/roads, sidewalks, demo
caretakers’ residences, landscaping, signage and traffic control
– Mobilization/demobilization of equipment
• Blythe locations to be completed first followed by
Quartzsite
• 220 day delivery timeline
Contract details
• Summarized bid estimate by item:
–
–
–
–
–
–
Structures =
Underground utilities =
Ramps/roads =
Sidewalks =
Demo caretakers’ residences =
Landscaping =
$950,000
$425,000
$350,000
$40,000
$65,000
$45,000
• Summarized bid estimate by item:
– Signage =
– Traffic control =
– Mobilization/demobilization: lump sum
• Total contract:
$20,000
$25,000
$250,000
$2,170,000
Do separate performance obligations exist?
What promises in the contract are distinct, if any?
Yes
No
• Distinct (both)
– Utility
• Customer can benefit from the services?
– Separately Identifiable
• No significant integration service provided?
• The goods and services are not interdependent, or interrelated?
• The goods and services are not significantly modified, or
customized?
• Series (both)
– Are the goods and services substantially the same?
– Do the goods and services have the same pattern of
transfer?
Conclusion – Keys
• 4 performance obligations consisting of each location and
each exit eastbound and westbound (4 sites)
• Each site is independent of the others.
• Each site has utility on its own.
• The absence of any specific location would not affect the
other locations in the contract.
• Possible to combine the sites at each location since they are
transferred concurrently and the outcome is the same as
accounting for them as individual performance obligations
• Mobilization would need to be allocated to each of the 4
performance obligations – allocation of the contract price is
outside of the scope of this presentation (see Step #4).
Mega Construction Project
Managers, Inc.
Contract details
• Construction Manager At Risk
– Campus expansion project
– University of Arizona School of Planning, Design & Construction
• Design and subcontractor procurement for construction:
–
–
–
–
Building D
Building E
Parking Ramp
Site work
Contract details
• Buildings D & E
– Construction of 2 identical 4 level office/classroom structures
– Mega to self-perform concrete work
– While each building would meet the definition of distinct they can
be combined
• Under the series of distinct performance obligations standard
• Parking Ramp
– Construction of a 5 level concrete parking structure
– Mega to self-perform concrete work
• Site work
– Grading, drainage, utilities, permits, general site prep
Contract details
• Single contract between Mega and UofA under GMP
• Contract procurement matrix includes provisional cost
estimates by Mega – by trade and scope of work
• Contractor and design contingencies provided
• Contract cost savings accrue to UofA
• Contract cost overages absorbed by Mega to the extent
an approved CO cannot be obtained
Contract details
• Cost estimates by scope/package:
–
–
–
–
Building D:
Building E:
Parking Ramp:
Site work:
$43,560,000
$39,770,000
$18,170,000
$ 8,350,000
• Contingencies and Fee:
– Design Contingency:
– Contractors Contingency:
– Contractors Fee:
• Total contract:
$ 2,000,000
$ 2,490,000
$ 8,050,000
$122,390,000
Potential Performance Obligations
•
•
•
•
•
•
•
Building D
Building E
Parking Ramp
Site Work
Buildings D & E
Buildings D & E & Parking Ramp
Buildings D & E & Parking Ramp & Site Work
Potential Performance Obligations
• Site Work –
–
–
–
–
Initial activity required prior to structure layout
Significant coordination of site work with schedule and activities for structures
Ongoing activity throughout the whole project – such as back fill
Final grade cannot be completed until structures in place
•
•
Site work is dependent upon the structures but is it highly dependent? - YES
Site work does not significantly modify or customize the structures nor do the structures
significantly modify or customize the site work
• Building D –
– Construction coordinated with Building E
– UofA can benefit from Building D on its own with other resources available to it and it meets the
standard of separately identifiable
• Building E –
– Construction coordinated with Building D
– UofA can benefit from Building E on its own with other resources available to it and it meets the
standard of separately identifiable
• Parking Ramp –
– Construction scheduled after substantial completion of Buildings D and E.
– UofA can benefit from the Parking Ramp on its own with other resources available to it and it
meets the standard of separately identifiable
Potential Performance Obligations
• Buildings D & E
– Mega will construct buildings D&E concurrently using the same crews and
subcontractors
– Since each building is to be identical, likely CO’s on one will be duplicated on
the other.
– Buildings can be combined into a single performance obligation because they
are delivered to UofA concurrently and the outcome is the same as
accounting for them as individual performance obligations
• Buildings D & E & Parking Ramp
– Does not qualify for series because units are not the same
– Does not qualify for combining because buildings and parking ramp are not
transferred concurrently to UofA
• Buildings D & E & Parking Ramp & Site Work
– Could be allowed under the concept that the entire scope is a single
performance obligation because in the context of the contract the customer
has been promised a bundle of all of the deliverables (the combined output).
Do separate performance obligations
exist?
What promises in the contract are distinct, if any?
Yes
No
• Distinct (both)
– Utility
• Customer can benefit from the services?
– Separately Identifiable
• No significant integration service provided?
• The goods and services are not interdependent, or
interrelated?
• The goods and services are not significantly modified, or
customized?
• Series (both)
– Are the goods and services substantially the same?
– Do the goods and services have the same pattern of
transfer?
Conclusion – Keys
• Contingencies would need to be excluded from the
contract price
• Contractors fee would need to be allocated to each
structure
• Could argue that Site work is not a deliverable and should
allocate to each structure
• Allocation of the contract price is outside of the scope of
this presentation (see Step #4).
Impact from Pending Exposure
Draft
• 606-10-25-21
– The objective when assessing whether an entity’s promise to
transfer goods or services to the customer are separately
identifiable in accordance with paragraph 606-10-25-19(b) is to
determine whether the nature of the entity’s overall promise in the
contract is to transfer each of those goods or services or whether
the promise is to transfer a combined item or items to which the
promised goods are inputs. Factors that indicate that two or more
promises to transfer goods or services to a customer are not
separately identifiable include, but are not limited to the following:
Impact from Pending Exposure
Draft
• 606-10-25-21 (a)
– The entity provides a significant service of integrating the goods or
services with other goods or services promised in the contract into
a bundle of goods or services that represent the combined output
or outputs for which the customer has contracted. In other words,
the entity is using the goods or services as inputs to produce or
deliver the combined output or outputs specified by the customer.
A combined output or outputs might include more than one phase,
element, or unit
• This language if adopted could lead more construction
contracts to be accounted for as single performance
obligations.
Variable Consideration
Variable Consideration
• Often, part of the contractual consideration related to a good or
service is variable in nature or contingent on future events.
(not an all inclusive list):
–
–
–
–
–
–
–
–
–
–
–
Unapproved change orders
Unpriced change orders
Performance bonuses — signing bonus, early completion, savings sharing, etc.
Project performance terms
Unit pricing
Economic price adjustments
Latent defects
Claims
Discounts
Refunds/Rebates
Royalties
Variable Consideration
• An entity shall estimate an amount of variable consideration by
using either of the following methods, depending on which
method the entity expects to better predict the amount of
consideration to which it will be entitled:
• Expected value – the expected value is the sum of probability
weighted amounts in a range of possible consideration amounts. An
expected value may be an appropriate estimate of the amount of
variable consideration if an entity has a large number of contracts with
similar characteristics. [JUDGMENT]
• Most likely amount – the most likely amount is the single most likely
amount in a range of possible consideration amounts (that is, the
single most likely outcome of the contract). The most likely amount
may be an appropriate estimate of an amount of variable
consideration if the contract has only two possible outcomes.
[JUDGMENT]
Constraint on Transaction Price
An entity shall include in the transaction price
some or all of an amount of variable consideration
An entity shall include in the transaction price some or
only to the extent that it is probable that a
all of an amount of variable consideration only to the
significant reversal in the amount of cumulative
extent that it is probable that a significant reversal in the
revenue recognized will not occur when the
amount of cumulative revenue recognized will not occur
uncertainty associated with the variable
when the uncertainty associated with the variable
consideration is subsequently resolved
consideration is subsequently resolved.
[JUDGMENT]
The transaction price including variable consideration and the
constraint shall be updated at the end of each reporting period.
Constraint on Transaction Price
• Factors that could increase the likelihood or the magnitude of a
revenue reversal include, but are not limited to, any of the following:
• The amount of consideration is highly susceptible to factors outside
the entity’s influence.
• The uncertainty about the amount of consideration is not expected to
be resolved for a long period of time.
• The entity’s experience (or other evidence) with similar types of
contracts is limited, or that experience (or other evidence) has limited
predictive value.
• The entity has a practice of either offering a broad range of price
concessions or changing payment terms and conditions of similar
contracts in similar circumstances.
• The contract has a large number and broad range of possible
consideration amounts.
Constraint on Transaction Price
• Past guidance from SOP 81-1 no longer a part of GAAP
– Accounting for Unpriced Change Orders
•
3 alternatives to reporting exists under current GAAP
– Contract Options and Additions
•
Guidance on when to treat as a separate contract
– Claims
•
4 conditions precedent for recognizing claim revenue prior to resolution
• Can an entity remain “conservative” in the recognition of contingent compensation?
– Answer is a resounding YES
– ASU 2014-09 constraint is to eliminate reversals of revenue. It does not state that
the transaction price should be constrained so that there is no subsequent
adjustment of any kind.
– This guidance resulted from input to FASB/IASB from sureties and bankers that
they did not like subsequent negative adjustments to revenue (and profits) but
were not as concerned about positive adjustments.
– It will continue to be acceptable under the new Revenue Recognition standard to
defer the recognition of claim or unapproved claim revenue until it is resolved
because there is no new guidance on positive adjustments
Implementation Thoughts
• Internal controls will be critical – the proper information needs
to be gathered.
• Operations personnel will need to be involved – project
managers, project engineers, estimating.
• Educate operations – distinct, separable, utility.
• Consider developing a checklist for the project file.
• Accounting at the G/L and job cost level
– This appears to be generally in place
– Some systems do not support phase or element job costing
– Systems generally do not provide for allocation of activities to two or
more phases (performance obligations)
– Systems do not have processes to measure the under/over-billing at
the performance level and then combine it at the contract level before
adjusting the balance sheet