By Becky Watson, CPA, Audit Manager
ASL Construction Group
The end of the year is coming fast and with it comes the requirement to adopt FASB ASC Topic 606 Revenue from Contracts with Customers by all calendar year-end private companies (this standard was applicable to public companies for calendar year 2018). If you have not yet implemented the new accounting standard, here are a few items to consider.
This is an instance of “the more, the merrier” as we recommend that you assemble a team to implement the new standard. This team could include representatives from the executive management, finance/accounting, estimating/project management, legal, sales, and IT departments. Company management will need to devote resources to the implementation team – time, access to systems and data, and possibly purchase new software. Training on the new standard for each team member is vital. Develop and implement the plan, including a timeline and communications platform, so the team and key personnel are aware of progress of the implementation.
This is an excellent opportunity to review your internal systems and make necessary changes to adapt to the new standard. The team should learn the requirements of the new standard and evaluate how well current internal controls serve to fulfill these requirements. Lines of communication and information required should be reviewed. Each team member can provide input on the data they need or can provide, and you can design an efficient process to gather data.
New accounting software could be purchased to replace error-prone and inefficient spreadsheet-based processes. New processes for communicating information may be needed in order to have the data necessary to meet the expanded disclosure requirements.
Contracts should be reviewed for clauses relating to what happens if there is an early termination, whether there are definitive rights to payments, what performance obligations should be delineated, whether completion bonuses and potential liquidated damages are probable. Each of these clauses could have an impact on revenue recognition under the new standard.
The timing of revenue recognition could be different going forward and might potentially impact the budget and cash flow projections.
The new standard will affect how performance-based compensation arrangements are implemented. If revenue recognition is accelerated, then bonuses may be paid earlier as revenue milestones are attained. Management and human resources should review and update compensation policies so that incentive programs continue to be effective.
We have published blogs in the past to discuss the 5 steps of revenue recognition and a blog on which adoption method to follow – links are below:
- Revenue Recognition Update – Step 1: Identify the Contract with the Customer
- Revenue Recognition Update – Step 2: Identify Performance Obligations
- Revenue Recognition Update – Step 3: Determine a Transaction Price
- Revenue Recognition Update – Step 4: Allocating Transaction Price to Performance Obligations
- Revenue Recognition Update – Step 5: Recognizing Revenue When (Or As) the Entity Satisfies a Performance Obligation
- Revenue Recognition Under the New Standards – Where to Start?
Contact our Construction Group if you have any additional questions about implementing ASC 606.