Proposed FASB Standard Has Some U.S. Contractors Worried
- Oct 26, 2010
Dees Stribling, Contributing Editor
Washington, D.C.–A proposed new accounting standard has some general contractors concerned that it might make it more difficult to proceed on construction projects as demand returns for new structures—such as multifamily. The standard, known as “Revenue from Contracts with Customers” would change the way entities recognize revenue from contracts with customers when they transfers goods or services to those customers.
Published in June by US Financial Accounting Standards Board (FASB), the comment period for the proposal ended this month. The proposal is part of a far-reaching, years-long effort to make U.S. generally accepted accounting principles (GAAP), which FASB oversees, converge with International Financial Reporting Standards (IFRSs), which most of the rest of the world uses.
If adopted, the proposal would create a single revenue-recognition standard that would be applied across various industries and capital markets. “The publication of this joint proposal represents a significant step forward toward global convergence in one of the most important and pervasive areas in financial reporting,” asserts FASB in a statement.
The organization further says that the new rule will remove inconsistencies in existing requirements; provide a more robust framework for addressing revenue recognition issues; improve comparability across companies, industries and capital markets; require enhanced disclosure; and clarify the accounting for contract costs.
Not everyone is so sure there won’t be unintended consequences, particularly for the construction industry in the United States. “The way it might affect developers is that contractors will have disincentives to become an investor in the project or to provide any kind of bridge or interim financing on a project,” Jerry Henderson, a partner with accountancy BKD and member of the Construction Financial Management Association, tells MHN. “Economics will still prevail, but there will be headwinds against doing these types of things.
“Developers who intend to sell their project after completion will also have to deal with these new rules for their own financial reporting if they report under GAAP,” he continues, “since these rules also apply to real estate transactions which will now more closely align with the international rules, specifically IFRIC 15.”
Steve Lords, CFO of contractor Martin Harris and a member of the FASB Private Company Reporting Committee, also has reservations about the new rules and their impact on development. “The revenue recognition standards would apply to all parties in all industries,” he tells MHN. “I think the most significant impact for developers would be related to the determination of the number of individual performance obligations on any particular project.
“The developer is going to want to consider the project as one contract, but the contractor may have to break the project into multiple performance obligations,” Lords adds. “This may also affect the timing of the recognition of revenue for the overall development, and that would complicate the approvals of the project financing as the expectations may be significantly different than lenders have been used to seeing.”