The time to adopt FASB 606 “revenue from contracts with customers” is fast approaching. Updates are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
Is your architecuture or engineering firm aware of this new standard and are you prepared to meet it?
Understanding Revenue from Contracts with Customers
Simply put, project-based firms will only be able to recognize revenue when a performance obligation has been satisfied and GAAP will require this new accounting practice. So, what does this mean in layman’s terms? Essentially, revenue must be captured in financial statements when a contractual milestone has been achieved or when a stated tangible product is delivered.
Overcoming Myths of FASB 606
Over the past few years, I have engaged with many clients who didn’t believe this directive was something that affected them. Some of their reasons included:
Small firm size
Firm is privately held and not subject to audit
All work is executed on a time and materials (T&M) basis
While these are reasonable assumptions on the surface, they are incorrect. The size of a firm, whether employee count or annual revenue, is not a factor in the application of this standard. Furthermore, if the only outside review comes from the bank regarding a line of credit, this standard will still be applied. It is also important to note that, unless T&M contracts have no limits or upsets, they need to be accounted for as if they are fixed price invoiced on a T&M basis.
Adjusting for FASB 606
How can you make sure your firm is compliant with the “FASB 606 - Revenue from Contracts with Customers” standard? A starting point is to recast your balance sheet by determining if historical revenues need to be re-evaluated and retroactively deferred. In other words, you’ll have to decide if your firm has over recognized revenue and if some of it should have been deferred. A good indicator is, if your historical method of earning revenue was based on the amounts that you invoiced to your clients, the answer is yes.
Next, the contract revenue needs to be re-calculated using a couple of different options. These include:
Percent complete in tandem with earned value
Cost incurred basis
Historically, many firms have consistently produced material negative impacts to projects and overall financial positions. In some cases, firms had been reserving for this which mitigated the impact, but often the reserves were not adequate. As a result, there was a credit to balance sheet for work in process and a debit was applied to retained earnings.
A Word to the Wise
FASB 606 is something your firm should not take lightly, and you are probably best served by seeking advice from CPAs and tax professionals to ensure the requirements are met. This updated standard calls for more disclosures as well as new business processes subject to internal controls. With these significant changes, you should also consider hiring an expert consultant to configure revenue recognition in your accounting system to appropriately accommodate your methods.
About the Author: Michael Kessler, PMP is a Principal Consultant at Full Sail Partners, providing resource planning and finance consulting, along with mentoring other consultants. With more than 30 years of experience working in and around project-based accounting in both the government contracting and professional services industry, his experience includes overseeing accounting, auditing and finance operations. Michael’s experience also includes working directly with Deltek providing system implementations and application support.
About Full Sail Partners: Full Sail Partners provides client-focused technology services and solutions for more than 1,000 professional services’ firms nationwide. As a Deltek Platinum Partner and Client Feedback Tool Premier Partner, Full Sail Partners helps project-based firms fully integrate their business processes by connecting their front end and backend systems. We seek to help organizations identify the critical resources needed to create a faster, more efficient, and cohesive business infrastructure. For more information, please visit the Full Sail Partners’ website at http://www.fullsailpartners.com/
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