In the current economy, supply chain issues and possible recessionary conditions can make it difficult for construction companies to forecast and maintain a healthy bottom line. Added to these issues are the complexities of maintaining compliance in billing and ASC 606 for construction companies.
Now is the ideal time for businesses in the construction industry to look at their ASC 606 reporting practices and make needed adjustments.
One common concern regarding ASC 606’s impact on revenue recognition for construction companies is the compatibility of the standards with the percentage of transfer accounting methodology.
Percentage of transfer accounting is commonly used for long-term contracts, especially with regard to common business models in the construction industry. Fortunately for many, the standard does allow this type of approach.
However, under ASC 606, this type of revenue recognition may be considered a contract with multiple performance obligations, that are not distinct, where control transfers over time.
Over-time vs. point in time revenue recognition
Precise guidance contained in ASC 606 must be applied to determine whether revenue is recognized over time (‘percentage of transfer’) or at a point in time. While the general principle is that revenue is recognized at a point in time if any of the criteria in ASC 606 are met then revenue should be recognized over time.
Established by both the FASB (Financial Accounting Standards Board) and International Accounting Standards Board (IASB), the following criteria are used to determine whether revenue should be recognized at a point in time or over time.
- Does the customer simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs?
- Does the entity’s performance create or enhance an asset that the customer controls as the asset is created or enhanced?
- Does the entity’s performance create an asset with no alternative use to the entity?
- And does the entity have an enforceable right to payment for performance completed to date?
If the answer is “yes” to any of the questions above, then the entity transfers control over time. The entity should then recognize revenue over time, using a method that depicts its performance. In this instance, the overall principle is that revenue is recognized to the extent that each of the vendor’s performance obligations has been satisfied.
If the answer is “no” to all the questions listed above, then the entity transfers control at a point in time. The entity should then recognize revenue at a point in time at which it transfers control of the good or service to the customer. The following indicators should be considered to determine whether control of an asset or service has been transferred:
- Does the customer have a present right to payment for the asset?
- Does the customer have legal title to the asset?
- Has the entity transferred physical possession of the asset to the customer?
- Does the customer have significant risks and rewards of ownership of the asset?
- Has the customer accepted the asset?
Companies may have to accommodate bulk processing of revenue, a representation of billed vs. unbilled amounts for certain types of transactions, and an ability to back out previously applied percentages where business conditions dictate.
Construction industry and billing
Simultaneously, companies in the construction industry often must contend with complex bill models. These models typically include the need to charge on a milestone basis that can be tied to or independent of the schedule for recognition of revenue.
Billing may occur before the performance (and therefore recognition of revenue) on the contract or after. Billing may include the need to establish, in an automated manner, the set of milestones associated with the contract and the need to automatically track when these milestones have been achieved to construct and deliver the bill.
Billing may also include the need to handle change events such as removed or added milestones, credits, cancelations, and a host of other post-processing events.
Billing and ASC 606 automation software for construction companies
SOFTRAX is the only vendor that provides an option to deploy revenue recognition for ASC 606 as an independent application, or as a complete Revenue Management System (RMS), combining support for complex billing and revenue recognition against ASC 606 / IFRS 15 in a single system.
Contact us to learn how SOFTRAX can help with complex revenue management requirements in the Telecom industry with leading revenue management software.