25 Sep 2019 Construction Dollars and Sense – New GAAP Rules
Construction Dollars and Sense
Tax and Financial Reporting
News and Tools September 2019
Financial reporting rules for construction contract or s have changed. If your 2019 financial statements look like 2018, the 2019 is probably wrong.
FASB, the Financial Accounting Standards Board, sets the rules and the rules have changed. The rules changed in 2014, with delayed implementation to 2019 for non-public companies. The new rules require new practices and procedures for recognizing revenue on contracts, new terminology and new disclosures.
The new rules took many years to formulate with FASB’s objective that all industries would be under the same guidelines for recognizing revenue from contracts with customers. Previously there were different rules for contractors, software sales, licenses, etc., so the implementation of one set of guidelines for all industries was a long, challenging task. Commonly used names for the new rules are “Revenue Recognition” and “ASC 606”. These new rules are now required for all financial statements that are GAAP (generally accepted accounting principles). Contractors’ sureties and lenders usually require GAAP financials, whether they are audited, reviewed or even if only compiled.
It will be easy for the financial statement users to tell if the 2019 statements are current GAAP or not because of the newly required terminology and disclosures, although most of the numbers and other parts of the financials will appear similar to the prior years. If those very apparent changes are not on the 2019 financials and the accompanying opinion letter says it is GAAP, it may not be.
It will not be easy for the construction company to get to that point of complance with the new rules. The contractor, often with the assistance of the company’s CPA, will need to perform new types of analysis of the terms of the contracts for multiple performance obligations within a single contract, variable consideration (bonuses, penalties, extras, etc.), constraints on the variable consideration (in order not to overstate possible future revenues), and new disclosures. The contractor will have to document the analysis, procedures and judgments that were used in the process for each contract, or for each group of highly similar contracts.
Some of the changes to the financial statements and the process of preparing the GAAP financials may include the documentation of whether or not the contractor actually has a contract with a customer. For example, if costs are incurred prior to having a valid contract, the costs may be presented differently than under the prior rules. If a contract is determined to have more than one performance obligation, the rules for the analysis and presentation of the multiple performance obligations are different than in prior years. If a contract has stored materials that have not been installed on the contract, the treatment of those can take several different directions depending on the individual facts and circumstances.
With the new rules comes the possibility that two contractors with identical contracts will come to different conclusions on the accounting and presentation of those contracts. For example, Contractor A may determine that its design/build project is two performance obligations while Contractor B may determine its identical contract is two or more obligations. New rules often take time to solidify.
Questions or comments? Contact Al Clark at 404-252-2208 or AClark@SmithAdcock.com.
The information herein is general in nature and should not be construed as advice or opinion of Smith, Adcock and Company LLP.
It should not be used as a substitute for competent advice which should be obtained from your Smith Adcock professional.
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