In 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09 which defines new guidance over revenue recognition that eliminates all transaction and industry-specific accounting principles and replaces them with a unified, five step approach. The new standard was effective for private companies for periods beginning after December 15, 2018. Due to the COVID-19 pandemic, the FASB further issued ASU 2020-05 which deferred the effective date of ASU 2014-09 to reporting periods beginning after December 15, 2019, for certain entities that had not yet issued their financial statements as of June 3, 2020. The last of the private companies that had elected to defer adoption of ASU 2014-09 in accordance with ASU 2020-05 have recently, or are working to, evaluate and implement the new standard.
A more tricky area of the new revenue recognition standard for contractors is the idea of uninstalled materials, or their impact on satisfying a performance obligation and how to account for them when performing the cost-to-cost revenue recognition calculation, or the failure to exclude such costs when performing cost-to-cost over time accounting. In accordance with FASB ASC 606-10-55-21, when an incurred cost is not proportionate to a contractor’s performance in satisfying a performance obligation, an adjustment of the input method may be needed to recognize revenue only to the extent of the uninstalled materials cost incurred.
The guidance continues, “a faithful depiction of an entity’s performance might be to recognize revenue at an amount equal to the cost of a good used to satisfy a performance obligation if the entity expects at contract inception that all of the following conditions would be met”:
- The good is not distinct.
- The customer is expected to obtain control of the good significantly before receiving services related to the good.
- The cost of the transferred good is significant relative to the total expected costs to completely satisfy the performance obligation.
- The entity procures the good from a third party and is not significantly involved in designing and manufacturing the good (but the entity is acting as a principal).
If uninstalled materials costs incurred is not proportionate with satisfying a performance obligation, then the cost of the uninstalled materials is excluded from the costs incurred to date in the cost-to-cost revenue recognition calculation. However, revenue equal to the cost of the uninstalled materials would be recognized. Therefore, no gross profit would be recognized on that uninstalled material cost. Once the uninstalled materials are installed and therefore proportionate with satisfying a performance obligation, the costs are then included in the cost-to-cost revenue recognition calculation and adjusted accordingly.
For more information regarding the uninstalled materials and Revenue Recognition for contractors, please contact your Keiter Opportunity Advisor, Brett Sinsabaugh, Business Assurance and Advisory Services Senior Manager or another member of our Real Estate and Construction team.
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