A Major Change in Revenue Recognition for Contractors?

Written by: David Summerall

The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB), issued a discussion paper “Preliminary Views in Revenue Recognition in Contracts with Customers” in December 2008.  If the proposed changes in recognizing revenue contained in the paper are implemented, it will substantially change construction accounting and, in fact, make it much more complex, expensive, and time consuming.

Currently, revenue recognition for accounting purposes is done for each individual project on a “percentage of completion basis.”  The new IASB/FASB standards would require that each project be subdivided into in individual “performance obligations.”  For example, many contracts contain site work, mechanical work, and electrical work.  For each individual obligation within those categories there would now need to be a separate accounting book keeping track of that one obligation.  If there are ten different obligations just for mechanical work alone, imagine how many books there would be by the end of the project.

The current percentage of completion method is not perfect, but the proposed performance obligation method could well be a nightmare.


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