Revenue Recognition Principle For Construction Companies

For years bankers and accountants have lobbied construction contractors behalf for exemptions from traditional gaap for revenue recognition.

Revenue recognition principle for construction companies. For private companies the new update will go into effect after december 31 2018. Published in 2014 the accounting standards update asu no. Subscribe to weekly revenue recognition update gaap has carved out a special niche for construction contractors. Current practice under ias 11.

To allow for comparison of revenues across industries the financial accounting standards board fasb introduced a five step model asc 606. The financial accounting standards board which oversees u s. For example if the ship could be easily sold to another customer and or the construction company s legal framework did not allow for it to legally enforce payment. There would be similar treatment under ias 11 however there are more specific requirements under ifrs 15.

These are contracts dedicated to the construction of an asset or a combination of assets such as large ships office buildings and other projects that usually span multiple years. This is a bit of a paradigm shift in the fasb s approach to standard setting. The wisdom of this is debatable but it s here now and it s a part of gaap. 45 long term construction type contracts 1955 and aicpa statement of position sop 81 1 accounting for performance of construction type and certain production type contracts 1981.

For non public companies it is. In accounting the terms sales and revenue can be and often are used interchangeably to mean the same thing. This is because of the nature of long term contracts. Historically generally accepted accounting principles related to revenue recognition have been rule based.

Asc 606 new revenue recognition standards. Revenue recognition principle for the provision of services one important area of the provision of services involves the accounting treatment of construction contracts. While there is no fasb statement for this area aicpa accounting research bulletin arb no. It calls for a single five step model by which most companies worldwide must recognize revenue under u s.

Generally accepted accounting principles gaap issued asc 606. However revenue recognition standards are anything but standard across industries. Revenue recognition is an accounting principle that outlines the specific conditions under which revenue sales revenue sales revenue is the income received by a company from its sales of goods or the provision of services. In construction companies previously reported on the basis of contracts.

That said there s a new rule in town. 2014 09 revenue from contracts with customers topic 606 is effective now for most public companies. Then revenue could not be recognised over time under ifrs 15. Revenue from contracts with customers as a new set of standards for recognizing revenue.

Gaap provides best practice accounting. The construction industry has long been held to a different standard of accounting for revenue.