Revenue Recognition for Contractors
Reading time: 3 minutes
The measurement of revenue is a critical process that allows management and others to make important decisions about the financial health of a construction company. On one level, it permits managers to understand how to bid new projects, establish rates, and conduct an overall evaluation of project profitability. On another level, revenue reporting gives executive leadership important information about trends, benchmarks, divisional performance, and essential details on when, and if, a large-scale investment for the company should be made. In other words, revenue including, how and when it is recognized, is massively important.
When the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, many were concerned that the new reporting changes were not only going to impact their internal accounting processes but also the company’s financial statement. Publicly held companies were required to comply with the changes for periods beginning after December 15, 2016, while non-public entities must implement the new standard for periods beginning after December 15, 2018.
Managing Revenue Recognition Without an Audit Committee
While many California construction companies and contractors have an Audit Committee, there are just as many that do not. In these situations, the list of questions/issues outlined below should still be considered by the company, but the discovery should be handled by the company’s CFO or equivalent with CEO (or designated team member) oversight. This combination ensures the financial reporting processes and policies are cleanly reviewed, and any refinements are deemed necessary by both executives. When necessary, it’s important to involve leaders of other departments as some changes may involve their participation in implementation.
Role of Audit Committee
Given the importance, it’s essential for Audit Committee members to have a solid understanding of the changes and how they vary from past practices and principles. Remember, one of the purposes of the revenue recognition change was to drive consistency in financial reporting and improve comparative analysis. It’s important to schedule time with key members of management to ask specific questions about the new standard, the adoption process, and how it’s expected to impact the company’s financial performance reporting.
There are a number of considerations which should be made, including:
- Does the audit committee have an oversight plan for monitoring the implementation and progress of adoption of the revenue recognition standard?
- What changes are being made to accounting policies to accommodate the new standard? Has the potential impact of these changes been evaluated?
- Has a thorough analysis of the tax implications of the change on the company been completed and reviewed?
- Are there construction industry-specific revenue recognition issues that need to be addressed?
- Past initial adoption, what type and level of education do accounting (and other departments) need to understand and ensure compliance with the new standard?
- How does the company plan to educate shareholders, creditors, and other stakeholders about the reporting change and what it means about the actual financial condition of the company?
- What steps is the company taking to enhance/refine the process to better accommodate changes outlined in the new regulations?
- Does the company have an ongoing transition plan that includes a financial assessment, key conversion activities, a timetable, required resources, and training?
- How will the revenue recognition standard affect the company’s business practices? This question should be considered both from the perspective of immediately and then over time as new lessons are learned.
The changes ushered in through revenue recognition will impact different construction companies to varying degrees. The key for Audit Committee members is to collaborate with management to gain an understanding of the immediate and long-term impact of these changes. It’s also important to ensure management and employees have access to the resources, tools, and education needed to maintain compliance. If you have questions about revenue recognition or need assistance with an audit or tax issue, JLK Rosenberger can help. For additional information, call us at 949-860-9890 or click here to contact us. We look forward to speaking with you soon.