General Inquiries

Revenue Recognition Question

  • 1.  Revenue Recognition Question

    Posted 08-05-2019 07:02
    I work for an environmental waste removal company.  We remove asbestos, lead and mold, and provide demolition, remediation and emergency response services.  We have always used the percentage of completion method and have 3-year average revenues of over $10M but under $25M.  So when I brought up the discussion with our external CPA regarding now being classified as a small business and whether or not we need to consider the completed contract method, he said it doesn't apply to this company.  He said we use percentage of completion because it's the most accurate way to account for revenue and costs but that the company as a whole doesn't qualify as a "construction" company so the revenue recognition principles do not apply????  Now perhaps the emergency response services we provide might not qualify as "construction type" because we could be in the middle of the ocean cleaning an oil spill or doing large scale hurricane cleanup. But, everything else?  Although we don't build buildings, we assist in the re-construction process and perform all of our work through a variety of short and long-term contracts.  Is there a tiered list of questions to determine where we fall, based on what trumps what?  Are the old and new revenue recognition rules only related to construction type contracts or is it based off of revenue from contracts?  Please help.  I'm so confused at this point.

    Debra Tallon

  • 2.  RE: Revenue Recognition Question

    Posted 08-06-2019 08:32
    Good morning Debra:

    You first start talking about methods on a tax return and wrap up with Rev Rec.  Most entities now that average under $25M can be under the cash method now for tax reporting purposes.

    For Revenue Rec, effective Jan 01, 2019, the new rules apply to all entities reporting under GAAP, irregardless of what industry you may be in.

    Does this help?

    Michael Karlins
    Calvetti Ferguson
    The Woodlands TX
    (832) 742-2411

  • 3.  RE: Revenue Recognition Question

    Posted 08-07-2019 09:47
      |   view attached

    Hello Debra,

    Your external CPA was likely referring to the fact that the new revenue recognition standard (ASC 606) transitions away from the terms "percentage of completion method" and "completed contract method" which were hallmarks of the AICPA's Statement of Position 81-1 first issued all the way back in 1981. Now, ASC 606 uses a five-step model  for determining revenue recognition, and it's that fifth step, which addresses when revenue is recognized. The terms that the new standard uses are "over time" vs. "at a point in time." Now, while in effect the "at a point in time" method may be similar to what the old "completed contract method' was, I think a lot of contractors are going to find that their contracts don't meet the criteria for revenues to be recognized at a point in time - effectively removing, if you will, the ability to utilize the completed contract method.

    Now if you didn't produce external financial statements, given your revenues being under $25M, you would qualify as a small business for tax purposes and likely would be able to use the cash method. However, if you issue a of GAAP basis financial statement, then ASC 606 must be adopted as of 01/01/19. Additionally, this standard applies to all businesses regardless of industry.

    I've attached a revenue recognition guide for contractors that my firm has put out jointly with CICPAC. For discussion of revenues recognized over time vs. a point in time, see pgs. 9-10. I hope you find it helpful.

    Chris Schwenk, CPA, CCIFP, CCA
    Harding, Shymanski & Company, P.S.C.
    Evansville, IN 47708
    Tel: 812-491-1341 | Fax: 812-492-6341Schwenk

  • 4.  RE: Revenue Recognition Question

    Posted 08-07-2019 12:32
    Thank you for your question and responses.  CFMA's Education Department understands ASC 606 raises lots of questions.
    Please join us for a new online course: Implementing Revenue Recognition Through the Eyes of the Contractor, Sept. 18 & 19, 2019 (3-5pm EST).

    By taking this course, contractors, CFMs, business owners, project managers and estimators will learn about the new Revenue Recognition standard and how the new information impacts job cost accounting and financial reporting.  Feel free to share this information with your colleagues, etc. 

    After completing this course, you will be able to:

    • Identify performance obligations
    • Know why and how to identify contract modifications and cost
    • Learn acceptable measures of progress

    Elizabeth Lachowicz
    Director, Education
    Princeton NJ
    (609) 452-8000