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BLUEPRINTS 2018.12.01

Posted by Admin Posted on Dec 04 2018

Revenue Recognition Changes

Effective January 1, 2019 for non-public companies, accounting for contracts will change significantly for the first time in 35 years. Although several characteristics of the old guidance are not drastically altered conceptually, there are numerous improvements in the new standard that allow for more comparable recognition of revenue, consistent terminology across industries, and enhanced disclosures. Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, is not only effective January 1, 2019, but any long-term contracts that are currently in process and extend past January 1, 2019 will be subject to the new standard.

The following are the main provisions of ASC 606:

  • Step 1 – identify the contract(s) with a customer
  • Step 2 – identify the performance obligations in the contract
  • Step 3 – determine the transaction price
  • Step 4 – allocate the transaction price to the performance obligations in the contract
  • Step 5 – recognize revenue when (or as) the entity satisfies a performance obligation

 

In order to have a successful implementation of ASC 606, each company should create an implementation plan that includes both internal and external stakeholders. Internal stakeholders include owners, accounting department personnel, project managers and estimators. External stakeholders include bankers, sureties, and other pre-qualification entities. The internal team selected to guide implementation should analyze revenue streams and begin the 5-step process above for each identified contract. The team should also consider potential impacts on debt covenants, taxes, bonding capacity, or incentive plans.

Some key areas of focus during the analysis phase will be multiple performance obligations, pre-contract costs, and uninstalled materials. Documentation and communication of the team’s determinations will be critical in maintaining consistent application of the new standard internally. This will allow for consistent reporting to external stakeholders.

For more information on how to prepare for the new revenue recognition, please contact me at Jasay@conoverasay.com.

Jared A. Asay, CPA, CCIFP | Financial Partner

Tempe, Arizona

Office | (480) 500-6333      Cell | (480) 684-4300

Email | Jasay@conoverasay.com