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CBIZ & MHM Executive Education Series™

Revenue Recognition Update for the Construction Industry James Comito & Austin Delimont May 12 & May 19, 2016

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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

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Before We Get Started…

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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.

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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.

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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 • jcomito@cbiz.com James Comito, CPA MHM Shareholder

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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 • adelimont@cbiz.com

Austin Delimont, CPA, CCIFP Manager

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Agenda

Revenue recognition now and how it is changing

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Example situations

Best practices for implementation

Questions

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REVENUE RECOGNITION NOW AND HOW IT IS CHANGING

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New Terminology

• Performance obligation • Distinct • Separately identifiable • Significant integration service • Highly dependent or interrelated • Series • Pattern of transfer • Constraint on variable consideration

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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.

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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.

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• 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

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• 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

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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

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• 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

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• 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

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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.

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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.

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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

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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

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EXAMPLES

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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

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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

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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

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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 -

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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

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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

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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

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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

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BEST PRACTICES FOR IMPLEMENTATION

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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?

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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

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? QUESTIONS

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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

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