Revenue is a critical component of an organization’s financial statements and is a very important number to users of those financial statements and in most cases plays an important role in how users assess the financial statements. Currently, Generally Accepted Accounting Principles allows for very broad revenue recognition principles that can very significantly among different industries.
On June 24, 2010, the Financial Accounting Standards Board, published an Exposure Draft – Revenue from Contracts with Customers. This proposed pronouncement was intended to provide a single/common revenue recognition model that can be applied to a wide range of industries and transaction types. This proposed pronouncement would supersede most existing guidance relating to revenue recognition.
This proposed change in the revenue recognition guidance will have a significant impact on the construction industry and will result in major changes to the way the revenue is currently accounted for in the construction industry. The proposed guidance calls for a performance obligation approach, which will require the contract to be broken down into smaller components and recognize revenue based on a value for each component. This may result in material differences in revenue recognition throughout the life of the contract as compared to the current percentage of completion method.
When the initial exposure draft was released there was a 120 comment period. This proposed revenue recognition pronouncement received significant negative feedback from folks within the construction industry. This criticism prompted the FASB to re-expose their revised proposals for a common revenue recognition standard in June. The FASB was expected to release a revised revenue recognition proposal in the third quarter of 2011, which did not happen. The new proposal is still expected to be issued during 2011 after which, another 120 day comment period will follow.
The construction industry played a key role in the FASB’s decision to put a hold on and revise the initial exposure draft. The revised guidance is still expected to be significantly different from the current percentage of completion method, but as mentioned above there will be another comment period to follow.
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