Published on May 12, 2016
1. #cbizmhmwebinar 1 CBIZ & MHM Executive Education Series™ Revenue Recognition Update for the Construction Industry James Comito & Austin Delimont May 12 & May 19, 2016
2. #cbizmhmwebinar 2 About Us • Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest* and advisory services • Over 2,900 professionals nationwide A member of Kreston International A global network of independent accounting firms
3. #cbizmhmwebinar 3 Before We Get Started… • To view this webinar in full screen mode, click on view options in the upper right hand corner. • Click the Support tab for technical assistance. • If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.
4. #cbizmhmwebinar 4 CPE Credit This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.
5. #cbizmhmwebinar 5 Disclaimer The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your service provider to further discuss the impact on your business.
6. #cbizmhmwebinar 6 Presenters The Director of MHM's Professional Standards Group, James has expertise in all aspects of revenue recognition, business combinations, impairment of goodwill and other intangible assets, accounting for stock-based compensation, accounting for equity and debt instruments and other accounting issues. Additionally, he has significant experience with a variety of other regulatory and corporate governance issues pertaining to publicly traded companies, including all aspects of internal control. In addition, James frequently speaks on accounting and auditing matters at various events for MHM. 858-795-2029 • [email protected] James Comito, CPA MHM Shareholder
7. #cbizmhmwebinar 7 Presenters Austin, a Manager in our Kansas City office, is responsible for performing small to large attest engagements, assisting in the preparation of financial statements for construction companies, and resolving critical audit and risk issues. Austin manages the day-to-day activities of attest engagements, assists in designing the approach to audits and guides the field staff in their auditing efforts. His previous experience working in the accounting department of a construction company allows him a unique inside perspective. Austin works with clients to understand their organization, procedures, and internal policies. Industries with which he has worked include construction, commercial and general manufacturing, consumer products and insurance. 816-945-5235 • [email protected] Austin Delimont, CPA, CCIFP Manager
8. #cbizmhmwebinar 8 Agenda Revenue recognition now and how it is changing 02 01 03 04 Example situations Best practices for implementation Questions
9. #cbizmhmwebinar 9 REVENUE RECOGNITION NOW AND HOW IT IS CHANGING
10. #cbizmhmwebinar 10 New Terminology • Performance obligation • Distinct • Separately identifiable • Significant integration service • Highly dependent or interrelated • Series • Pattern of transfer • Constraint on variable consideration
11. #cbizmhmwebinar 11 The Contract and Unit of Measure • Single contract • Combine two or more contracts with the same customer if one or more of the following criteria are met: • Negotiated as a package with a single commercial objective, or • Consideration paid on one contract dependent on price or performance of the others, or • Promised goods and services are a single performance obligation.
12. #cbizmhmwebinar 12 The Contract and Unit of Measure • Contract modifications (change orders) • Changes in the scope and/or price of a contract • Creates new, or changes existing, enforceable rights and obligations of the parties to the contract • Account for a contract modification as a separate contract if both of the following conditions are present: • The scope increases because of the addition of promised goods and services that are Distinct, and • The price increases by an amount of consideration that reflects the entity’s Standalone selling prices of the additional promised goods or services.
13. #cbizmhmwebinar 13 • A Promise in a contract with a customer to transfer a good or service to the customer. • Promises are: • A good or service (or bundle) that is Distinct • A Series of Distinct goods or services that are substantially the same and have the same pattern of transfer • Immaterial promises ignored – Standard issued last month Definition – Performance Obligation
14. #cbizmhmwebinar 14 • A promised good or service is Distinct if both of the following are met: • The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (capable of being distinct – in other words: has utility on its own) • The entity’s promise to transfer the good or service to the customer is Separately Identifiable from other promises in the contract (good or service is distinct within the context of the contract) Definition – Distinct
15. #cbizmhmwebinar 15 Definition – Separately Identifiable • Separately identifiable promises do not exist when: • A significant integration service is provided • Good or service significantly modifies or customizes another good or service promised in the contract • Good or service highly dependent on, or highly interrelated with, another good or service promised in the contract
16. #cbizmhmwebinar 16 • Significant integration service – The individual goods or services are inputs to produce a single output. • Significant modification or customization – Each good or service is being assembled together (that is, as inputs) to produce a combined output for which the customer has contracted. • Highly dependent on, or highly interrelated with – The customer could not choose to purchase only one or more goods or services without affecting the other promised goods or services in the contract. Definitions – Separately Identifiable
17. #cbizmhmwebinar 17 • A Promise in a contract with a customer to transfer a good or service to the customer. • Promises are: • A good or service (or bundle) that is Distinct • A Series of Distinct goods or services that are substantially the same and have the same pattern of transfer Performance Obligation – Recap
18. #cbizmhmwebinar 18 A Bundle • A Bundle • If a good or service is not distinct, an entity shall combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. • The Bundle concept should result in identification of a single performance obligation and recognition of revenue at the contract level for a majority of construction contracts. • However, each contract must be evaluated.
19. #cbizmhmwebinar 19 A Series • A Series • Each promised good or service is otherwise distinct • Each promised good or service is substantially the same, but do not need to be identical • Each promised good or service has the same pattern of transfer if both of the following criteria are met: • Each distinct good or service that is promised in the contract would meet the criteria for a performance obligation satisfied over time, and • The same method is used to measure progress towards satisfaction of the performance obligation.
20. #cbizmhmwebinar 20 Not a Bundle – Not a Series • Potential for multiple performance obligations • Contracts that promise both goods and services • Contracts with O&M • IDIQ • Job order contracting • Contract modifications/add-ons under revised GMP • Separate/different deliverables
21. #cbizmhmwebinar 21 Recognition of Revenue • Performance obligation satisfied over time • Control is transferred to the customer over time, and • Therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met: • The customer simultaneously receives and consumes the benefits provided by performance • Performance creates or enhances an asset the customer controls • Performance does not create an asset with an alternative use, and an enforceable right to payment for performance to date exists
22. #cbizmhmwebinar 22 EXAMPLES
23. #cbizmhmwebinar 23 Guidance • Current GAAP • Included in the contract amount and recognized in revenue when it is probable the specified performance standards are expected to be met or exceeded and can be reliably measured. • Topic 606 • Fall under the realm of “variable consideration.” Included in the contract amount at the inception of the contract when it is probable there will not be a significant reversal of revenue in the future. The amount included is calculated using either the “expected value” or “most likely amount” approach. Variable Consideration – Awards/Incentive Payments
24. #cbizmhmwebinar 24 Example - Situation • Example Co. enters into a contract to build an office building • Fixed price of the contract is $10 million • Price is increased by $10,000 for each day finished before August 1st and decreased by $10,000 for each day finished after August 1st • Additional bonus of $500,000 if the building achieves the specified green certification level in the contract Variable Consideration – Awards/Incentive Payments
25. #cbizmhmwebinar 25 Example – Treatment at Contract Inception • Current GAAP • Neither of the “variable” pricing amounts are probable and Example Co. accounts for the contract using a contract price of $10 million. If it becomes probable that either of the “variable” items will occur, the contract amount is adjusted at that time and recognized on a prospective basis. Variable Consideration – Awards/Incentive Payments
26. #cbizmhmwebinar 26 Example – Treatment at Contract Inception • Topic 606 Variable Consideration – Awards/Incentive Payments Amount Probability Adjustment 5 days early 50,000 40% 20,000 On time - 40% - 5 days late (50,000) 20% (10,000) 100% 10,000 $500,000 awarded if specific green certification is met Yes Choose yes 500,000 No -
27. #cbizmhmwebinar 27 Example – Treatment at Contract Inception • Topic 606 • The multiple options for the daily bonus/penalty make the “expected value” the best approach. • Add $10,000 • There are only two options for the green certification bonus, which makes the “most likely amount” the best approach. • Add $500,000 • Contract price at inception is $10,510,000 Variable Consideration – Awards/Incentive Payments
28. #cbizmhmwebinar 28 Guidance • Current GAAP • Often included as a normal cost of the project and figured into the percentage of completion calculation when using the cost to cost method. • Topic 606 • If all the characteristics of “uninstalled materials” are met at inception of the contract an amount equal to the cost of the materials is removed from both contract costs and contract revenue and accounted for separately (zero profit margin). Uninstalled Materials
29. #cbizmhmwebinar 29 Background Transaction Price: $5,000,000 Total cost estimate: Materials $1,500,000 Other costs $2,500,000 Total $4,000,000 • Materials delivered • Entity is not involved with the design or manufacture of the materials • Customer obtains control of materials upon delivery • Other costs incurred to date- $500,000 Uninstalled Materials - Example #19 from ASU 2014-09 Revenue recognition under Topic 606 Materials ‘carved out’ Revenue $1,500,000 Materials cost $1,500,000 Profit $ 0 “Percent complete” Other costs $ 500,000 Total other costs $2,500,000 Cost/Cost % complete 20% Other revenue $3,500,000 Other rev recog. to date $ 700,000
30. #cbizmhmwebinar 30 Total revenue recognized: Materials $1,500,000 Other revenue $ 700,000 Total $2,200,000 Total cost recognized: Materials $1,500,000 Other costs $ 500,000 Total $2,000,000 Uninstalled Materials - Example #19 from ASU 2014-09 Profit recognized: Total revenue $2,200,000 Total costs $2,000,000 Profit $ 200,000 Profit recognized under current GAAP: Total revenue $2,500,000 Total costs $2,000,000 Profit $ 500,000 “Percent complete” under current GAAP Costs incurred $2,000,000 Total estimated costs $4,000,000 Cost/Cost % complete 50% Contract price $5,000,000 Rev recog. to date $2,500,000
31. #cbizmhmwebinar 31 BEST PRACTICES FOR IMPLEMENTATION
32. #cbizmhmwebinar 32 Best practices for implementation • Take an inventory of your current contracts • Are there different groups? • What are the normal features? • How will they be affected by Topic 606? • What are the unusual features? • How will they be affected by Topic 606? • Is there anything to change in future contracts (if possible)? • Create a checklist • What are the items in your “normal” contracts that need to be identified so that decisions can be made up front? • What are items that cause a contract to be different than normal? • What steps need to be taken when these items are identified?
33. #cbizmhmwebinar 33 Best practices for implementation • Involve outside parties now • Auditors • Sureties • Bankers • Start building accounting policies and justifications for items requiring judgement • Build policies based on past history • Example – Liquidated damages are assessed on 10% of projects • Determine what personnel inside and outside of accounting need to be involved
34. #cbizmhmwebinar 34 ? QUESTIONS
35. #cbizmhmwebinar 35 If You Enjoyed This Webinar… Upcoming courses: • 5/18 & 6/7: Primer on Plan Reporting Changes Under ASU 2015-12 • 6/1: Unclaimed, Unidentified but Undeniable - A Primer on Managing your Abandoned Property • 6/2 & 6/9: Doubling Up - The Combined Benefits of Cost Segregation and Tangible Property Regulations Related publications: • Revenue Recognition Updates for Performance Obligations and Licensing • Principal Versus Agent Consideration Finalized for Revenue Recognition Standard • Revenue Recognition Serial and Other Resources
36. #cbizmhmwebinar 36 Connect with Us linkedin.com/company/ mayer-hoffman-mccann-p.c. @mhm_pc youtube.com/ mayerhoffmanmccann slideshare.net/mhmpc linkedin.com/company/ cbiz-mhm-llc @cbizmhm youtube.com/ BizTipsVideos slideshare.net/CBIZInc MHM CBIZ
37. #cbizmhmwebinar 37 THANK YOU CBIZ & Mayer Hoffman McCann P.C. [email protected]