By Steve Rizer
Engineering and construction (E&C) entities may need to change some of their revenue recognition practices as a result of new guidance that the Financial Accounting Standards Board (FASB) and International Accounting Standards Board have unveiled, according to an analysis that Ernst & Young LLP released last month. While many of the principles in the new standard are similar to the guidance that remains in effect for now, “entities should not assume that the pattern of revenue recognition for their arrangements will be unchanged. E&C entities will need to make many judgments that they may not be used to making.”
Among other things, the new standard prescribes several new disclosure requirements that E&C entities will need to evaluate, Ernst & Young stated. “On both an interim and annual basis, an entity generally will have to provide more disclosures than it does today and include qualitative and quantitative information about its contracts with customers, significant judgments made (and changes in those judgments), and capitalized contract costs.”
The new guidance, “Topic 606, Revenue from Contracts with Customers,” will supersede the current revenue recognition requirements in Topic 605 and most industry-specific guidance throughout the Industry Topics of the Codification, FASB explained. The new standard is scheduled to go into effect for public entities for fiscal years beginning after Dec. 15, 2016, and for interim periods therein. For non-public entities, it will become effective for fiscal years beginning a year later and for interim periods within fiscal years starting after Dec. 15, 2018.
Ernst and Young additionally cautioned that an entity “will need to exercise judgment when considering the terms of the contract/s and all of the facts and circumstances, including implied contract terms. An entity also will have to apply the requirements of the new standard consistently to contracts with similar characteristics and in similar circumstances.”
The ConstructionPro Network member version of this article includes a complete transcript of ConstructionPro Week's interview with FASB spokesperson Christine Klimek about the guidance, including her advice for E&C entities as they transition to Topic 606 implementation.