Executive Insight: Revenue Recognition

Executive Insight: Revenue Recognition

Construction Executive magazine regularly features executive insights from industy leaders in construction.

In the May 2013 issue, Richard Werner, P.E addressed the new revenue recognition methodology ASC 605-35 when he was asked "What do contractors need to know about Revenue Recognition and how it affects consruction contracts.

The In Dick’s view, revenue recognition for construction contracts with customers is complicated due to the difficulty in properly matching costs and revenue over a long period of time. ASC 605-35 attempts to address this issue for lump sum and unit price contracts that define revenue as:

Incurred cost + percent complete x estimated margin at completion 
where estimated margin at completion is defined as contract amount - estimated cost at completion

The goal of ASC 605-35 is to eliminate separate standards for particular industries and create a single standard for all industries. While this is a worthy goal, pitfalls may arise by forcing all industries into a mold that does not fit. Revenue recognition for the construction industry is significantly different from other industries, and the ASC 605-35 recommendations may be the case in point. 

It appears to the writer that the present system with its “look back” rule, has worked well for many years, and the changes proposed in ASC 605-35 will create a lot of extra work, will not improve and may be a step backwards to the revenue recognition process.

Construction Executive is the official magazine of Associated Builders and Contractors (ABC).

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