B2W Flipbooks

Page | 6 3. The contracts require closely interrelated construction activities with substantial common costs that cannot be separately identifi ed with, or reasonably allocated to the elements, phases or units of output. 4. The contracts are performed concurrently or in a continuous sequence under the same project management at the same location or at diff erent locations in the same general vicinity. 5. The contracts constitute, in substance, an agreement with a single customer. Under the new guidance the combining of contracts is required if one or more of the following conditions below exist: 1. The contracts are negotiated as a package with a single commercial objective. 2. The amount of consideration to be paid in one contract depends on the price or performance of the other contract. 3. The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation in accordance with ASC 606-10-25-14 through 25-22. Note that negotiating multiple contracts at the same time does not necessarily demonstrate the contracts represent a single arrangement. The more likely scenario for combining will occur when a contractor prices a second contract based on advantages existing in the fi rst contract. An example is that the second contract can use the general conditions of the fi rst project with minimal additional cost. The guidance in the new standard was included because in some cases, the amount and timing of revenue recognition might diff er depending on whether an entity accounts for contracts as a single contract or separately. One possible diff erence is that under the new GAAP a loss is measured at the level of the combined contracts rather than on a contract by contract basis. So if a contractor enters into a loss leader contract to obtain a follow-on contract, the loss on the initial contract would not be accrued but would merely reduce the overall profi t on the combined contract. The presentation of a contract asset/liability (under/ over billing) is limited to one account per contract. When the contracts are combined for reporting purposes only one under/overbilling will be reported on the combined contract level. So if one contract is underbilled and the other is overbilled the net amount will be refl ected on the statement of fi nancial position. Judgment will need to be made on whether contracts are entered into at or near the same time because there is no bright line in making the assessment but it is noted that the longer the period between entering into diff erent contracts, the more likely the economics have changed. As noted above the current guidance allowed the entity to combine contracts if certain items existed but in the new guidance it is required to combine contracts if those items above exist. The principles Identifying Contracts with Customers (continued) >

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