Building toward the future

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Building toward the future: FASB/IASB revenue recognition exposure draft

At a glance

This PwC white paper discusses the significant impact that the provisions of the proposed new revenue recognition model may have on engineering and construction companies.

FASB/IASB revenue recognition exposure draft

On June 24th, 2010 the FASB and IASB each issued an exposure draft titled "Revenue from contracts with customers" proposing a new revenue recognition model that could fundamentally alter the way entities across various industries, including the engineering & construction (E&C) industry, recognize revenue. The proposal is an output of the boards' joint efforts to develop a converged revenue recognition standard based on the same principles. A key objective is to increase the consistency of revenue recognition for similar contracts, regardless of industry. The proposed model is a contract-based approach that focuses on the assets and liabilities that are created when an entity enters into and performs under a contract.

Upon the effective date of a new revenue recognition standard, SOP 81-1 and IAS 11 (existing industry-specific construction contract revenue and cost guidance), and indeed all existing revenue recognition guidance under US GAAP and IFRS, will be eliminated. This includes, at least in title, the use of the percentage-of-completion method and related construction cost accounting guidance.

To help explain the significant impact that the proposed model's provisions may have on the E&C industry, PwC has developed a summary of the draft that highlights key areas of focus. It includes practical examples on how the model will apply to situations, such as when revenue can be recognized, the accounting for change orders, award fees, claims, customer furnished materials, contract costs and warranties.