Revenue Recognition Under the New Standards – Where to Start?

By Josh Cross, CPA, Senior Audit Manager
ASL Construction Group

Sometimes the hardest part of any major implementation project is figuring out where to start.

How about we start with trying to identify the most appropriate implementation method for your construction company.  One of the questions we get all the time is: Which implementation method is best for my company?  Unfortunately, there is no universal answer, but we will give you some insights into what we are hearing within the industry.

Before we do that, let’s refresh ourselves on the two methods:

  1. Full retrospective adoption with optional practical expedients would apply the new standard to all periods presented in the financial statements.
  2. Modified retrospective adoption allows companies to apply the new standard to contracts that are outstanding as of the date of implementation. To elect this method, companies would examine those outstanding contracts and compare how the revenue would be recognized under the new standard versus existing GAAP.  Any difference in revenue would be adjusted to beginning retained earnings.  No adjustment would be made to prior periods presented.

The biggest concern that everyone has initially with the modified retrospective method, is that revenue could “disappear” from the income statement in the initial year of implementation because you are not making any adjustments to the prior periods presented, rather, any difference as of the date of implementation is adjusted through beginning retained earnings.  However, it sounds like the construction and real estate industry as a whole believes that the modified retrospective approach will ultimately become the industry standard.  There may be some large aerospace and defense contractors and possibly others that choose the full retrospective, but it will depend on their specific circumstances.

We have just begun the first full year of implementation for public companies (except those that early adopted), so the industry will soon begin to see real-life examples of the impact this new standard has on a company’s financial statements, as well as the magnitude of the significant disclosure requirements.  Although it is currently the industry’s opinion that the modified retrospective approach will ultimately be the standard, that could change once companies get a first-hand view of the impacts.

For additional information, check out our other articles on the new revenue recognition standard, and please contact us with any questions you may have.