B2W Flipbooks

Page | 37 When performance obligations are to be recognized over time, an appropriate driver should be selected to measure the progress of transferring control to the customer. Again, judgment will be required in this selection and should be based on the nature of the contract. Both input and output methods are generally acceptable as long as they appropriately measure the transfer of control of goods or services to the customer. Once a method of recognition is selected for a certain performance obligation, it must be used until the performance obligation is satisfi ed. Changing methods is not allowed. Output methods such as time lapsed, units produced, surveyed or appraised results, or milestones reached may be preferable if they accurately measure the progress in transfer of control to the customer; however, these methods must be reliably and consistently measured throughout the performance of the contract. Input methods used to recognize revenue such as cost incurred, resources consumed, labor hours utilized, and time elapsed relative to the estimated total inputs are acceptable under ASC 606. Absent an identifi ed input or output method that better measures progress, the use of cost incurred to total estimated cost, as is often used in current percentage of completion accounting, can be continued by the construction industry. It is important to note that the use of the cost-to-cost method is not a free election, but rather can be utilized only if it results in a reasonably accurate approximation of transfer of control to the customer. If control is not ratably transferred, cost-to-cost may not be a satisfactory measure. Current percentage of completion methods are Method A and Method B. Method A recognizes both revenue and costs based on the percentage of completion. Method B recognizes revenue equal to costs incurred plus the amount of estimated gross profi t that is earned based on the percent complete. Neither of these methods are permissible under the new standard. Under ASC 606 revenue is measured and not gross profi t. In selecting the most appropriate input or output measure the entity should focus only on revenue. Under current GAAP some specialty contractors may have used labor as an appropriate measure of recognition of gross profi t under Method B. However, under ASC 606 labor may not be an appropriate proxy to measure revenue. When using the input method, it is important to note that only inputs that depict the transfer of control should be included in the input method calculation. Costs or other inputs that are deemed to be ineffi cient in the context of the performance of the contract should not result in the recognition of revenue. Judgment should be applied when determining ineffi ciencies in performance. Ineffi cient costs that are known or expected at the inception of the contract are likely included Recognizing Revenue >

• Cover