FASB voted to propose a one-year deferral of the effective date of the new revenue recognition rules, and is considering amendments to the original standard.
On April 1, 2015, the Financial Accounting Standards Board (FASB) voted to propose a one-year deferral of the effective date of the new revenue recognition rules. If approved, both public and nonpublic companies will have one additional year to prepare for adoption of the new requirements. In addition, the FASB is considering amendments to the original standard to help clarify certain aspects of the new standards.
Creating a uniform method to report revenue
The FASB and the International Accounting Standards Board (IASB) originally approved the new revenue recognition standard on May 28, 2014. It created a uniform requirement for how companies report revenue from customer contracts in their financial statements. The new standard is more of a “principles-based” philosophy, meaning that it doesn’t have detailed rules to follow when determining how revenue and gross profit will be recorded.
Principles-based philosophy
It is this principles-based philosophy that is creating confusion and the need for additional guidance. For the construction and real estate industries, the identification of “performance obligations” needs further clarification. In many cases, but not all, construction and real estate contracts will contain only one performance obligation, for instance, the completion of a building. But in larger, design-build projects or multi-phase real estate developments, the performance obligations may be complicated. Determining performance obligations will be the biggest implementation challenge facing construction and real estate entities.
With the delay, nonpublic companies would apply the new rules to annual reporting periods beginning after December 15, 2018 (i.e., January 1, 2019, for a calendar year entity). Public companies would be required to apply the new reporting for periods beginning after December 15, 2017 (i.e., January 1, 2018, for a calendar year entity). The standard can be adopted early, but not prior to the effective date for public companies.
Delaying implementation will provide the opportunity for additional guidance, but it does not change any of the underlying steps to recognize revenue for contracts with a customer.
How we can help
By now, companies should fully understand the new revenue recognition rules and the impact they will have on financial statements because those concepts are not changing. However, while the FASB and IASB continue to work on guidance for this new standard, many in the construction and real estate industries may have questions. Our broad array of clients and many years of experience in the construction and real estate industries can help you understand how these changes impact your organization, so that you can adapt to these standards and embrace the changes with confidence.