Revenue Recognition for the AE Industry
Presented by:
M. Scott Hursh, CPA, CCIFP®, CDA
Managing Shareholder
AE Industry Group
Stambaugh Ness, PC
Brian W. Rosenberg, CPA, MBA
Senior Manager
Brown, Schultz, Sheridan & Fritz
Revenue Recognition for the AE Industry
Agenda

Background

Overview of new revenue recognition model

Contract costs

Disclosures

Effective dates and transition

Examples

Questions / Discussion
Revenue Recognition for the AE Industry
Current Guidance



Accounting Standards Codification (ASC) Topic 910-605
Pre-Codification SOP 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts”
Specific to issues unique to the construction industry
New Guidance

Initial Exposure Draft June 2010 – Revised Exposure Draft
November 2011

Intended to apply consistently across all industries

Joint project with IASB

FASB ASU 2014-09 – Revenue from Contracts with
Customers (Topic 606) -Issued May 2014
Core Principle

“An entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services.”
 Transfer is based on control – Who has the ability to direct
the use of and receive the benefit of the asset? (Work in
Process)
 Factors to consider when determining whether a transfer
exists:
•
•
•
•
Unconditional obligation to pay
Legal title
Physical possession
Customer-specific design
Revenue Recognition - 5 Steps
Identify the
contract(s)
with a
customer
Identify the
performance
obligations in
the contract
Determine the
transaction
price
Allocate the
transaction
price to the
performance
obligations in
the contract
Recognize
revenue when
(or as) the
entity satisfies
a performance
obligation
Step 1 – Identify the Contract
Identify the contract(s)
with a customer
Identify the Contract(s) with a Customer

Contracts meet the following criteria:
•
•
•
•
•

Approval and commitment of the parties
Identification of the rights of the parties
Identification of the payment terms
Contract has commercial substance
Probable that the entity will collect the consideration
(transaction will be completed)
Combining Contracts
•
•
•
Contracts negotiated as a package with a single commercial
objective
Amount of consideration to be paid in one contract depends
on the price or performance of the other
Goods or services promised in the contracts are a single
performance obligation
Identify the Contract(s) with a Customer - continued

Contract Modifications
•
Accounted for as separate contract if:
1.
2.
•
•
•
•
addition of distinct good or service and
price of the contract increases by an amount equal to
standalone selling prices
If not required to account for as separate contract,
accounted for as a change to transaction price
Approved change in scope, but not price, estimate the
change in price
Adjustment made on a cumulative catch-up basis on date
of modification (prospective accounting)
Claims and change orders (approved and unapproved)
b
Recognize estimated margin if scope approved, but price not
agreed
Contract Modifications

May exist even if dispute in price, scope or both

Scope may be approved but price has not been
approved

May be written, verbal, or customary business
practice

This is a change in current practice

Must determine whether rights and obligations
created by the modification are enforceable

Facts and circumstances
Step 2 – Identify Performance Obligations
Identify the contract(s)
with a customer
Identify the
performance obligations
in the contract
Identify the Performance Obligations in the Contract



Performance Obligation – Promise in a contract with a
customer to transfer a good or service to the customer
Account for each distinct, or series of distinct, goods or
services as a separate performance obligation
Distinct
1.
2.

Customer can benefit from the good or service either on its
own or together with other resources that are readily
available to the customer, and
Promise to transfer good or service is separately
identifiable from other promises in the contract
Series of distinct goods or services – goods and
services that are substantially the same and have the
same pattern of transfer
Identify the Performance Obligations in the Contract continued


An entire contract can be accounted for as one
performance obligation
A good or service is not distinct if:
•
•
•


The goods or services are highly interdependent and
interrelated
The entity provides a significant integration service
The goods or services significantly modify or customize
other goods or services in the contract
Assurance-type warranties are not distinct
performance obligations
One performance obligation for many, but not all,
AE contracts
Step 3 – Transaction Price
Identify the
contract(s) with
a customer
Identify the
performance
obligations in
the contract
Determine the
transaction
price
Determine the Transaction Price


Transaction Price – Amount of consideration to
which an entity expects to be entitled in exchange
for transferring goods or services
Variable Consideration
•
•
Incentives, penalties, claims, performance bonuses,
liquidated damages
Estimate the expected value or most likely amount
b
b
•
Sum of probability-weighted amounts
Most likely of two possible outcomes (achieve performance
bonus or not)
Constraint for estimates – only included to the extent it is
probable that a significant reversal of revenue recognized
will not occur
Determine the Transaction Price - continued

Other Considerations:
•
•
Time value of money (only if significant financing
component)
Noncash consideration
Step 4 – Allocate Transaction Price
Identify the
contract(s) with a
customer
Identify the
performance
obligations in the
contract
Determine the
transaction price
Allocate the
transaction price
to the
performance
obligations in the
contract
Allocate Transaction Price to Separate Performance
Obligations


The transaction price is allocated to all separate
performance obligations in proportion to the standalone selling price of each (at contract inception)
If a stand-alone selling price is not directly observable,
must be estimated
•
•
•

When estimating, an entity “shall maximize the use of
observable inputs”
Cost plus margin approach – forecast costs and add
anticipated margin
Adjusted market assessment approach – what a customer
would have paid if it were a separate transaction
Subsequent changes to transaction price
•
Allocate any changes in the transaction price to separate
performance obligations on same basis as at contract
inception.
Step 5 – Recognize Revenue
Identify the
contract(s)
with a
customer
Identify the
performance
obligations in
the contract
Determine the
transaction
price
Allocate the
transaction
price to the
performance
obligations in
the contract
Recognize
revenue when
(or as) the
entity satisfies
a performance
obligation
Recognition of Revenue – Satisfaction of Performance
Obligations


Revenue is recognized when (or as) a performance
obligation is satisfied by transferring goods or
services to a customer.
Transfer occurs when (or as) the customer obtains
control.
•
Ability to direct the use and obtain substantially all the
benefits
•
Point in time or over time
Recognition of Revenue – Satisfaction of Performance
Obligations - continued

Control is transferred over time if one of the
following criteria are met:
1.
2.
3.
Customer simultaneously receives and consumes the
benefits provided by the entity’s performance as the entity
performs
Entity’s performance creates or enhances an asset (work
in process) that the customer controls as the asset is
created or enhanced
Entity’s performance does not create an asset with an
alternative use to the entity, and the entity has an
enforceable right to payment for performance
completed to date
Recognition of Revenue Over Time

Customer simultaneously receives and consumes
•
•

Customer controls asset
•

This includes cases in which another firm would not need
to substantially reperform the work completed to date to
fulfill the remaining performance obligation (aside from
practical or contractual limitations)
This applies to services, not goods
Generally applies on customer's land
No alternative use, and right to payment
•
1.
2.
Drawings, site plans, technical specs
Firm is restricted from selling to or using for another
customer - customer could enforce rights
Right to payment for work completed to date at any time in
contract, if terminated without cause - must consider laws
and contractual terms
Recognition of Revenue – Satisfaction of Performance
Obligations


Revenue recognized over time - consistently apply
a method to measure progress toward completion:
Methods to measure progress:
1. Output Methods – basis of units produced or delivered,
contract milestones
2. Input Methods – basis of efforts expended to date relative
to total efforts expected to be expended. (cost to cost,
labor hours, machine hours, etc.)
b
Exclude the effects of inputs that do not depict the transfer of
goods or services (material or labor overruns)
Recognition of Revenue – Satisfaction of Performance
Obligations - continued


Updates to measure of progress accounted for as
change in accounting estimate in the period the
change is determined
Reasonable measure of progress – early stages of a
contract, recognize revenue only to the extent of the
costs incurred (zero margin)
Recognition of Revenue – Satisfaction of Performance
Obligations - continued

If control not transferred over time, revenue
recognized the point in time when performance
obligation is satisfied and control is transferred

Indicators of transfer of control include, but not
limited to:
•
Entity has a present right to payment
•
Customer has legal title
•
Transfer of physical possession
•
Customer has significant risks and rewards of ownership
•
Customer has accepted the asset
Contract Costs

Incremental costs of obtaining a contract
•
Capitalized as an asset if expect to recover
b
b
•

can be expensed as incurred if the amortization period is one
year or less
amortized on a systematic basis consistent with the pattern of
transfer of the goods or services
Costs that the entity would not have incurred if the contract
had not been obtained
Costs to fulfill a contract
•
•
Look to other guidance first (inventories, software
development costs)
Recognize as an asset if costs relate directly to a contract
and are expected to be recovered based on future
performance
Contract Costs - continued

Costs to Fulfill a Contract
•
•
•
Direct labor
Direct materials
Allocations of costs that relate directly to the contract or
contract activities
b
•
•
Costs explicitly chargeable to the customer under the
contract provisions
Other costs incurred only because the entity entered into
the contract
b

Depreciation of equipment, tools, supervision, insurance, etc.
Subcontract costs
Uninstalled materials
•
•
Exclude from measurement of progress
Recognize revenue equal to cost (zero margin)
Disclosures



Revenue recognized from contracts disclosed
separately from other sources of revenues
Impairment losses recognized on any contract
receivables or contract assets
Disaggregation of Revenue
• Revenue recognized as of point in time and over
time
• Qualitative information about how economic
factors (type of customer, geographical location
of customers, and type of contracts)
Disclosures - continued



Opening and closing balances of receivables,
contract assets, and contract liabilities
Methods used to recognize revenue (input/output
methods), information regarding variable
consideration recognition
Contract Asset = Costs in Excess / Contract Liability
= Billings in Excess
Effective Dates and Transition

Effective Dates
•
•

Public entities – Annual reporting periods beginning after
12/15/17 (calendar year 2018); early adoption prohibited
Non-public entities – Annual reporting periods beginning
after 12/15/18 (calendar year 2019); early adoption
permitted to public entity effective date
Transition
•
•
Retrospective application – restate prior periods upon
adoption, or
Apply to existing contracts in progress on the effective date
and new contracts going forward
b
Requires cumulative effect adjustment and certain additional
transition disclosures
Example – Contract Modifications






Example 8 - Contract to design a commercial building for $1
million and a bonus of $200,000 if construction costs are
less than $100,000,000.
At contract inception – Transaction price= $1m; est. cost
$700K
Exclude $200K bonus from transaction price
Input measure – costs incurred, 60% complete after first
year ($420K)
Q1, Year 2 – no additional costs incurred; modification to
contract - price increased $150K, costs $120K,
modifications not distinct, bonus now probable (Estimates
received)
Cumulative catch-up adjustment - 51.2%
complete($420/$820) on $1,350,000 transaction price =
$91,200 revenue adjustment
Example – Claims





Example 9 – Disputed claim
Customer-caused delays result in additional costs
(Overhead rate and labor costs increased)
Contractor has legal basis in claim (included in
contract terms)
Does not result in any additional goods or services
provided to customer and all remaining goods or
services to be provided after the modification are not
distinct
Adjust transaction price for estimated amount of
claim (considering constraint concept) – cumulative
catch-up adjustment
Example – Performance Obligation




Example 10 – Goods and Services Are Not Distinct
Contract to design a bridge - responsible for design,
engineering, survey, permitting
Promised goods and services are capable of being
distinct, but
Promise to transfer individual goods and services in
the contract are not separately identifiable from
other promises in the contract.
Provides the service of integrating the goods and services
into the bridge
Account for all goods and services in the contact as a single
performance obligation
•
Example – Revenue Recognized Over Time





Example 14 – Consulting Service
Provides professional opinion to customer
If contract terminated, successor firm would need to
substantially reperform work in process because no
benefit from predecessor
Benefit is only received at delivery of opinion
But:
•
•

No alternative use since facts and circumstances specific
Firm has enforceable right to bill for time incurred to date
(including profit)
Thus revenue is recognized over time
Example – Revenue Recognized at Point in Time

Example 16 – Build WWTP for Customer

Contract specifies 10% payment at inception,
regular payments over work period of 50%, then
final 40% due at completion - payments
nonrefundable unless firm fails to perform - if
customer terminates contract, firm can only retain
progress payments to date

Cumulative payments are not expected at all times
to correspond to work done (no right to payment for
performance to date)

Thus cannot recognize revenue over time
Example – Uninstalled Materials

Example 19

Highway construction, including installation of
precast bridge. Bridge delivered 3 months prior to
being installed.

Exclude cost of bridge from progress measurement
(% complete)

Revenue recognized up to cost of bridge (zero
margin)
Example – Variable Consideration / Retainage

Example 20 – Penalty provision = variable
consideration
•


Must determine amount to include in transaction price
Example 21 - Estimating variable consideration
•
Expected value method used for portion including multiple
outcomes
•
Most likely method when only 2 outcomes
Example 27 – Retainage
•
Retainage not determined to be financing component –
intended to protect the customer from the contractor failing
to complete its obligations
Questions / Discussion
M. Scott Hursh, CPA, CCIFP®, CDA
Managing Partner
AEC Industry Group
Stambaugh Ness, PC
Phone: 800.745.8233
Email: shursh@stambaughness.com
_____________________
Brian W. Rosenberg, CPA, MBA
Senior Manager
Brown, Schultz, Sheridan & Fritz
Phone: 717.761.7171
Email: brianrosenberg@bssf.com