It is common to have many questions about how the New Guidance applies to your contracts. The New Guidance is principles based and requires the application of all five steps to make a final determination on how revenue is recognized.
One common question is whether the New Guidance continues to allow the percentage of completion accounting methodology that is commonly used by construction companies for long term contracts. You will be happy to hear that the New Guidance does allow this type of approach.
Which Approach is Right for Your Business?
There are two options available for adoption of the New Guidance:
1. Full Retrospective Method (Cumulative Effect Adjustment to Retained Earnings in the Earliest Period Presented)
2. Simplified Approach (Modified Retrospective Application with a Cumulative Effect Adjustment to Retained Earnings in the Year of Adoption)
Construction companies should decide which option is a better fit for their businesses after a careful review of their contracts. Should there not be any substantial changes in revenue recognition for a given business, that organization is able to implement either of these methodologies.
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