Considerations for Construction Companies Regarding Revenue Recognition Standard Topic 606

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Owning and operating a business is tough. It comes with a sometimes overwhelming amount of stress and responsibilities; maintaining client relationships, meeting deadlines, retaining and recruiting invaluable employees, adapting to new technology, keeping up with the latest laws and regulations, and the list goes on.

Those are clearly difficult tasks, and that’s without consideration of the new revenue recognition standard that was scheduled for implementation for nonpublic and not-for-profit companies with annual reporting periods beginning after December 15, 2018. On June 3, 2020, the Financial Accounting Standards Board (FASB) made the decision to delay the implementation of the revenue recognition standard for one year, making it effective for all nonpublic and not-for-profit entities with annual reporting periods beginning after December 15, 2019.

The new standard, Topic 606 Revenue From Contracts with Customers, sets guidelines for how entities will be required to start recognizing revenue in accordance with U.S. Generally Accepted Accounting Principles (GAAP) by allocating contract prices to specific identifiable performance obligations.

This standard specifically affects the construction industry as it relates to the complexity of traditional contract agreements, performance obligations, variable consideration, and pre-contract costs. Revenue recognition may be affected by factors such as the likelihood of performance penalties or the potential success of a pending claim. 

Implementing and maintaining a detailed job costing schedule will play a key role in accurately capturing how costs are allocated to each individual job, and in turn how revenue is recognized on that job according to U.S. GAAP. 

Even though the required implementation of this standard has been delayed for those who have not already implemented, it is important to communicate with your CPA in order to strategize specific ways to ease the transition to this new standard of recognizing revenues, as many bonding agencies and banks will not allow financial statements to be presented with a departure from U.S. GAAP basis.

Now is a great time to review the job costing structure within your company and assess the viability of maintaining U.S. GAAP financial statements, as well as analyzing contracts for elements of variable consideration. Contact a CPA on the Construction Team at Jones & Roth for more information on these standards. 

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