ABC - Changes to Revenue Recongnition Will Negatively Impact Contractors

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CHANGES TO REVENUE RECONGNITION WILL NEGATIVELY IMPACT CONTRACTORS (09/29/2010)

The Financial Accounting Standards Board (FASB) issued a proposal, or “exposure draft,” that would significantly alter contractor financial statements and would eliminate the percentage-of-completion method of accounting as currently used by construction contracts.

The proposal is an attempt by FASB to unify the United States Generally Accepted Accounting Principles (GAAP), which is the framework that dictates how financial statements are prepared in the U.S., with the International Standards. The elimination of the percentage-of-completion method is part of FASB’s “one size fits all” approach meant to bring US GAAP and International Standards in line, but instead the proposal will reduce the standardization of methodologies, increase complexity, add costs, and result in a financial statement that does not meet the needs of users.

Currently, contractors must use the percentage-of-completion method to report taxable income from long-term contracts by estimating what percentage of the contract has been completed within the year. The degree of completion is generally determined by comparing the total allocated contract costs incurred to date with the total estimated contract costs.

Under the new proposal, contracts themselves would no longer be the basis for computations, but instead they would be broken down into performance obligations, which are contractual obligations to deliver goods or provide services. This could present a problem for contractors when trying to determine how to divide each contract into performance obligations. In addition, rather than using incurred costs to compute revenue, contractors would only be able to report revenue once a performance obligation was satisfied, which is when control of a good or service is transferred to the customer. As a result of the proposed changes, surety underwriters have indicated that they may still require contractors to supply information on a contract-by-contract basis, as the old method required, compounding the amount of work a contractor would have to do in order to become bonded.

“At a time when the commercial construction industry is facing a difficult economy, this is exactly what contractors don’t need,” said Rich Shavell, CPA, Shavell & Company, P.A., Boca Raton, Fla. “Contractors don’t need someone telling them to change their reporting to a methodology that will not be accepted by their surety and will likely reduce their bonding capacity. Contractors need to voice their opinion to the FASB and tell them why this is a bad idea.”

Comments on the Exposure Draft will be accepted by FASB until Oct. 22 but FASB has not announced when the new rules will be effective.

ABC also will be signing onto comment filed by the Construction Financial Management Association (CFMA) before the deadline, as well as submitting its own set of comments. For more information, please visit CFMA’s website at: http://www.cfma.org/fasb_rev_rec.

ABC, jointly with CFMA, is holding a webinar on Wednesday Oct. 7, 2010 at 4 PM ET. See ABC’s website for details.