You probably have heard rumblings about the perils of proposed changes to revenue recognition rules, which would have severe implications to the construction industry. What are the details of these implications and the costs associated with compliance if the exposure draft is passed in its current state? In a nutshell, many contractors would be required to separate individual contracts into a series of separate “performance obligations,” each of which would require allocations of the contract price, separate accounting for costs incurred to date and estimates for total anticipated contract costs and related costs to complete by “performance obligation.”
The effort involved to produce an accurate work-in-process schedule, based on the proposed standard, undoubtedly would increase significantly. These proposed changes would dramatically increase both internal costs and external costs for most contractors in order to comply with GAAP. Further, there would be much greater opportunities for manipulation of financial statements since the number of estimates will have multiplied many times. This degree of contract bifurcation and the subjectivity that accompanies it will also result in increased audit costs, not to mention greater scrutiny by sureties, which could lead to fewer opportunities to secure contracts. Clearly this is a significant issue for the construction industry.
What can you do to combat this situation? Let the FASB know your concerns! Comments to the exposure draft are due this Friday, October 22, 2010. There is not much time left. The FASB has a great deal of information on this topic on its website. In addition, CFMA has established a revenue recognition resource center on its website, which has a summary of the issue, links to several archived webinars, and a letter template to assist with drafting a response. For your convenience, CLICK HERE to download, complete and send your individual response letter to FASB. Once again, all responses are due by October 22, 2010.
For more information, please contact Eugene DeFrank at firstname.lastname@example.org.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.