On March 28, the Financial Accounting Standards Board (FASB), the organization responsible for establishing accounting principles generally accepted in the United States (GAAP), issued its highly anticipated revenue recognition
standard. The release of ASU 2014-09, Revenue from Contracts with Customers, is the final step in a protracted international process to develop a single worldwide revenue recognition standard. While the new method contains many changes to how and when businesses will recognize revenue, the impact on contractors is far less radical than for many other industries.

The most significant change made by the new standard is replacing the longstanding accounting concept of recognizing revenue when it is realized and earned with a new concept of recognizing revenue upon completion of a “performance obligation.”

A performance obligation is a contractual promise to transfer specific goods or services to a customer for a price. The contract may consist of a single performance obligation, usually performed at a point in time, such as a simple retail sale. Or, it may consist of multiple individually “distinct” performance obligations, usually performed over time, such as a sale of a software license packaged together with customization and annual upgrades.

For contracts with multiple performance obligations, the standard requires the contract price, or the “transaction price,” to be allocated between each distinct performance obligation within the contract. The allocations generally are based on the amounts by which each discrete performance obligation would be sold as a standalone transaction. The seller recognizes revenue for the applicable portion of the contract price when the customer takes control of a specific performance obligation’s goods or services.

Under this structure, a long-term construction contract could potentially consist of hundreds or even thousands of individual performance obligations. Fortunately, under guidelines established by the new standard, a contractor may determine that an entire long-term construction contract is actually a single performance obligation rather than a series of individually distinct obligations. This effectively allows contractors to continue to recognize revenue under the familiar percentage-of-complete method with only a few modifications. 

Contractors will be able to recognize contract revenue ratably over the life of a contract by using either an “output” or an “input” method. The output method recognizes revenue on the basis of direct measurements of the value of goods and services transferred to the customer relative to the remaining goods and services promised in the contract. Output measures include surveys, appraisals, milestones, units produced or units delivered.  

The input method recognizes revenue on the basis of inputs that contribute to satisfying the performance obligation. Input measures include resources consumed, labor hours logged and direct costs incurred. In determining costs to date, only costs that directly contribute to the seller’s completion of the performance obligation are included; costs attributable to inefficiencies in the seller’s performance, such as lost time and wasted or uninstalled materials, are excluded from costs to date when determining revenue recognition.

Also, depending on the specific circumstances, approved change orders are accounted for as:
  • a part of the existing contract
  • a separate contract; or
  • a termination of the existing contract and the creation of a new contract.
Each of these methods may result in revenue being recognized at different times over the life of the contract. Barring a legally enforceable contract right, revenue from unapproved change orders and claims is not recognized until approved by both parties to the contract.

Perhaps the most significant challenge the new standard poses to contractors is the increase in both quantitative and qualitative information that must be disclosed in the footnotes of financial statements. The disclosure requirements for privately held companies are far less extensive than those for publicly traded companies, but they are more detailed than the disclosures required under previous standards. A few of the required disclosures for private companies include:
  • when the entity typically satisfies its performance obligations (e.g., as services are rendered or upon completion of service);
  • the significant payment terms in its contracts;
  • the nature of the goods or services the entity has promised to transfer;
  • warranties and related obligations; and 
  • the timing of satisfaction of performance obligations.
Remember, the new standard only applies to financial statements; it does not change how costs and revenue are determined for tax purposes. This difference may require maintaining two sets of contract cost and revenue records.

Also keep in mind there is much more to digest in the 700-page standard, and additional accounting issues will become clearer as the industry gains a better understanding of the complex regulations. Fortunately, the standard is not effective for private companies until 2018 (years beginning after Dec. 15, 2017) and for public companies until 2017 (years beginning after Dec. 15, 2016), with early adoption prohibited. However, the standards will be effective retrospectively, meaning that any contract in progress at the beginning of the earliest period included in the financial statements must be presented using the new recognition standard. As such, contractors should begin to plan how best to adapt to the new standard in the very near future.


Robert E. Williams is senior technical manager at Wouch Maloney & Co., LLP. For more information, visit www.wm-cpa.com.