12 Revenue Recognition Concerns
Many preparers and practitioners have been anxiously awaiting the new, converged revenue recognition standard for quite some time. The standard was released by the Financial Accounting Standards Board and the International Accounting Standards Board on May 28. How can we prepare for a smooth transition to the new standard? What major changes will we encounter as we begin implementing it? The new standard is principle-based, which is a big shift from the industry-specific guidance we have today. In preparation for this change in approach, the AICPA has established 16 industry task forces which are developing a new accounting guide containing helpful tips and illustrative examples for applying the new revenue recognition standard.
As the co-chairs of the Construction Contractors Revenue Recognition Task Force, we have been thinking about our major implementation issues for a while now. Here are our top 12 concerns so far.
- Disclosures and More Disclosures: Many new and potentially complex disclosures, such as more disaggregation of revenue, remaining performance obligations (i.e., deliverables) and contract balances, will be necessary.
- Accounting for Contract Modifications: Significant judgments in the accounting for change orders and claims will increase over the existing prescriptive accounting guidance.
- Training: The amount of training and time required to embed the new standard in every facet of the business will be significant, especially for project managers and other non-financial personnel who know GAAP as “how the system works.”
- Transition: Companies will face costly transitions, from determining opening balances and dual tracking for retrospective adoption, to system changes and key stakeholder education.
- Contract Value vs. Transaction Price: The new standard introduces the term “Transaction Price” which will need to be reconciled both conceptually and in value to the current and well understood term of “Contract Value.” Consideration will also need to be given to how variable amounts (e.g., award fees, liquidated damages, etc.) are factored into the determination of the transaction price.
- Systems Modifications: Significant system modifications will be needed to capture the additional information required under the new standard, including disclosures, tracking performance obligations and contract balances.
- Redevelopment of specific company policies:
Most companies have well established and documented accounting policies under current GAAP; those policies will have to be revisited and changed based on the new guidance.
- Accounts Receivable:
Philosophical changes may be required from the current practice of transferring amounts from “unbilled accounts receivable” to “billed accounts receivable” when an invoice is submitted to a client, to transferring amounts from “contract assets” to “accounts receivable” when a right to payment occurs, which may be unrelated to the timing of the invoice.
- Audit Requirements: Enhanced audit requirements will be necessary around the use of estimates in a financial statement audit and to understand and validate changes in internal controls and related processes.
- Key Metrics: Changes will likely be made to key financial performance metrics. Compensation, benefit arrangements, pre-qualification requirements and bonding/surety capacity may be affected.
- Tax Accounting: New differences between book accounting and tax accounting are likely to result from implementation of the new standard, as corresponding changes to the tax laws are not expected.
- Uncertainty: Since this standard affects a wide array of stakeholders, we will have to wait and see how the views of other regulatory bodies impact the application of these principles.
For more information, visit the AICPA’s Revenue Recognition webpage where you will find revenue recognition news, resources including a learning and implementation plan, an audit committee primer and more.
What are your top concerns regarding the revenue recognition standard?
Reed Brimhall, CPA, Vice President and Chief Accounting Officer, URS Corporation. Reed is responsible for all aspects of accounting and financial reporting and compliance for URS, including Securities Exchange Commission reporting and compliance, compliance with the U.S. Federal Acquisition Regulation, Sarbanes-Oxley Act compliance and tax matters. He is a co-chair of the AICPA’s Revenue Recognition Construction Contractors Industry Task Force.
Michael Sobolewski, CPA, Assurance Partner, U.S. Engineering & Construction Industry Technical Specialist, PwC. Mike has spent his entire career in the construction, automotive and manufacturing industries, working only with private companies having operations locally, nationally and globally. He currently serves as PwC’s U.S. firm's engineering and construction technical specialist and client service advisor. Mike is a co-chair of the AICPA’s Revenue Recognition Construction Contractors Industry Task Force.