FASB constructs new rules for contractors
In June 2010, the Financial Accounting Standards Board (FASB) issued a draft titled “Revenue from Contracts with Customers” which, if finalized, will significantly impact the way contractors report their income or loss on projects. This article from Construction Business Owner summarizes the proposed changes as follows:
– If a contract warranty is deemed to represent a “separate performance obligation”, the estimated costs of fulfilling that warranty must be accrued. The effect of accruing these expenses would be decreased profits.
– Contractors are required to estimate the total costs of projects. Many times these estimates must be revised throughout the project due to unforeseen circumstances. The current FASB rules smooth out the changes in estimated costs over the life of the project. Therefore, all periods of the project have a similar profit margin. The new rules do not do this. Under the new rules, the profit margin may differ significantly throughout the life of the project due to changes in estimated costs.
After the draft was issued, several comment letters sent to the FASB voiced their apprehension about the proposed standard. Due to the amount of comments received, FASB has re-issued the draft in September 2011. A 120-day comment period is available from the date of re-issuance. After this period, FASB will review the comments and issue a final standard, which is expected no earlier than late second quarter 2012. The effective date of the final standard will most likely be after December 31, 2014. ShindelRock will follow these changes and keep you updated.