How Contractors Handle Revenue from Contracts with Customers
On May 23, 2019, Barnes Dennig hosted a seminar on the intricacies of the adoption of ASC 606 – Revenue from Contracts with Customers, for contractors. Tom Groskopf, Director at Barnes Dennig, and Dan Holthaus, Senior Manager at Barnes Dennig, discussed the accounting standard that became effective for all private calendar year-end companies on January 1, 2019.
The construction industry is uniquely set up to handle a number of areas of the new standard. The standard focuses specifically on contracts with customers. The construction industry has been signing contracts with customers and has put robust controls in place over contracts already, putting itself ahead of many other industries in this respect. The construction industry has also been tracking all of its contracts and costs using a work-in-process schedule in order to appropriately perform the cost-to-cost percentage of completion computation. This inventory of all contracts, which reconciles to the company’s revenue, is a great process and control that many other industries do not already have in place.
However, having these controls and processes in place will not allow contractors to simply adopt the new revenue standard without issue and continue recognizing revenue the same way they have. The new standard brings about new judgments that could have a material impact on any contractor, depending on the facts and circumstances of their contracts and their customers. These may include:
- Defining the contract and modifications (change orders);
- Defining the contract price, including variable consideration;
- How to determine if you have multiple performance obligations;
- How to allocate the contract price and variable consideration to multiple performance obligations;
- Changes to contract costs and capitalization;
- Whether you recognize revenue at a point in time, or over time.
These questions and judgments were addressed in our seminar on May 23, 2019. If you missed the seminar but would like more information, please contact a Barnes Dennig representative and we will be happy to discuss the revenue standard and its implications on your business.