Over the last six months our Construction Industry team here at Lane Gorman Trubitt has been working on producing an informative video series covering the new revenue recognition guidance and how it will impact how contractors consider and account for revenue on its contracts with customers. During that time we have fielded questions about this topic and its impact on the construction industry. Here are the some of the most frequently asked questions.
Q: What is this and where did it come from?
A:The Financial Accounting Standards Board (FASB) in 2014 released new guidance on how revenue from contracts with customer should be recognized. One of the objectives of the guidance was to attempt to streamline how revenue was recognized across industries. As part of this, FASB introduce a five step process to follow in order to determine the amount of revenue that will be recognized and when it will be recognized.
Q: What are the five steps in the new standard?
A: In our upcoming video series we will address these in detail (click the link below or go here) but the five steps are:
- Identify the contract with the customer. This is important so that you know the rights and obligations for each party. Among other things it is important that in the contract, there are enforceable obligations and it identifies terms of payment.
- Identify all performance obligations in the contract. A performance obligation is the distinct good(s) or service(s) to be provided as part the contract. When evaluating the performance obligation that exist within the contract, it is important to take a look at what the customer will receive benefit from.
- Determine the transaction price. This involves determining the consideration the company will receive in exchange for the good or service.
- Step four is taking that transaction price and applying it to each of the performance obligations that were identified in the contract during Step 2.
- Recognize the revenue. Under the new guidance revenue is recognized either at a point in time or over a period of time as the performance obligation(s) is satisfied. Revenue recognized at a point in time is similar to the existing completed contract revenue recognition method. Revenue that is recognized over a period of time is similar to the percentage of completion method.
Q: How does it affect my construction business?
A: This can be a lengthy process and can sometimes complicated due to the terms and scope of work of the contract. If you have any questions about this process, you can watch the video at the link below or reach out to us so that we can guide you through this process.
Ready to learn more? Click below to be taken to our revenue recognition construction video playlist.