B2W Flipbooks

Page | 22 Unpriced and unapproved change orders will likely be the most challenging and frequent types of transactions for contractors evaluation of variable consideration. If deemed appropriate, an entity can combine pending items that have similar risks to assess the amount of variable consideration to be included in the transaction price and in assessing the constraint. Risk of signifi cant reversal may be indicated by (ASC 606-10-32-12): • The amount is highly susceptible to factors outside the entity's control. • The uncertainty is not expected to be resolved for a long period of time. • The entity's experience (or other evidence) with similar types of contracts is limited. • The entity has a practice of off ering a broad range of price concessions, changing terms frequently, or many possible diff erent consideration amounts. • Additional factors unique to the contractor may exist as well. Throughout the life of the contract, as additional information is provided to clarify assumptions of the variable consideration or circumstances originally identifi ed change, the contractor must update the estimated amounts recorded. In accordance with ASC 606-10-32-14, the contractor should update the contract price in each period. The cumulative eff ect of the change is recognized in revenue in the period that the change is recorded. Due to the nature of construction contracts, there is often a high level of susceptibility to factors outside the entity's infl uence that will likely constrain some or all of the estimate of awards and incentives based on timing or performance metrics to the extent that it is probable that a signifi cant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved. Entities are required to update the estimated transaction price (including assessment of constraint of variable consideration) at the end of each reporting period to represent faithfully the circumstances present at the end of the reporting period and any changes in circumstances. For variable consideration such as liquidated damages, contractors need to consider the following regarding the magnitude of the penalty: history of similar projects, lack of experience with similar types of contracts, competing in a new marker or capability. Internal procedures should be developed, following steps similar to the above listing, to address each area of variable consideration that an entity would reasonably experience. Internal procedures for contractors to comply with guidance for variable consideration related to a contract penalty provision, are as follows: Evaluating Variable Consideration (continued) > The contractor is required to evaluate whether to "constrain" amounts of variable consideration included in the transaction price. The objective of the constraint is to include variable consideration in the transaction price only to the extent it is "probable" that a signifi cation revenue reversal will not occur when uncertainty is subsequently resolved. Note: "Signifi cant" is relative to cumulative revenue recognized on the contract.

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