In December 2008, the Financial Accounting Standards Board (“FASB”) released a discussion paper entitled, Preliminary Views on Revenue Recognition in Contracts with Customers. Included in the paper was the proposal that revenue should not be recognized until contract performance obligations have been satisfied. Many in the construction community interpreted this to mean that the percentage-of-completion method of revenue recognition would be prohibited. This caused a significant amount of concern throughout the industry.
Then in June 2010, the FASB (along with the international accounting board) (collectively the “Boards”), issued an Exposure Draft that clarified its position on revenue recognition for construction contractors. The Exposure Draft continued to allow for the use of the percentage-of-completion method to the extent that a customer controls the work-in-process. If the customer specifies the design or function of a construction project, which is most often the case, the customer is considered to have control of the work-in-process.
Many in the construction community were satisfied with this clarification; however, the Exposure Draft caused additional concerns.
Specifically, the proposed rules provided contractors more flexibility in determining a profit center. For example, under the current rule, the entire contract is generally accounted for as a single profit center. The proposed rule allowed for distinct performance obligations to be accounted for as a separate profit center. A performance obligation is considered distinct if it can be sold separately, or if it has a distinct function and profit margin. Most construction contracts have numerous interrelated components and many in the construction community viewed the newly proposed rule as impractical.
After additional deliberations, in January 2012, the Boards released another Exposure Draft. Again the Boards appeased the construction community by introducing the concept of ‘bundling’ performance obligations. The concept of ‘bundling’ specifically addresses the interrelated performance obligations unique to a construction contract. In short, this Exposure Draft continues to allow construction contractors to account for a construction contract as a single profit center.
After years of discussion and hundreds of comment letters from the construction community, the Accounting Boards appear to have come full circle on their proposals on revenue recognition. Ultimately, it does not appear that revenue recognition will significantly change for construction contracts.
The Exposure Draft is open for public comment until March 13, 2012 and the final rules are scheduled to be published in the first half of 2012. The Accounting Boards have announced that the effective date to implement the new rules will not be effective earlier than for annual reporting periods beginning on or after January 1, 2015.
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