Financial Accounting Standards Board (FASB) Proposed Revenue Recognition Accounting Standard Could Have Significant Impact on Contractor Financial Documentation

In June, the Financial Accounting Standards Board (FASB) released their exposure draft on a new revenue recognition standard which will have a significant impact on how contractors prepare their financial statements to obtain surety credit and on how surety professionals review their clients’ financial documentation. Under the proposed rule, revenue recognition will follow a performance obligation model, rather than a percentage of completion model. This proposed standard will create significant challenges for the construction community and has the potential to adversely affect surety credit.

The proposed standard casts open the door to much greater subjectivity in both the timing and amount of revenue being recognized. The degree of subjectivity may be so great that consistency in financial reporting will be significantly diminished. Such subjectivity creates an environment that is more open to manipulation and financial engineering to achieve a desired end result. This level of subjectivity also sets stage for conflict within organizations (e.g. between operations and finance roles) regarding the timing and amount of revenue being recognized as well as conflict between organizations and their outside auditors.

NASBP is working with other industry groups, such as the Construction Financial Management Association (CFMA), to inform those affected about the proposed changes and to encourage these organizations and their constituents to submit comments to FASB regarding the proposed standard by the deadline of October 22, 2010.

NASBP would like your input and assistance on this IASB and FASB revenue recognition proposed rule. Your view of the attached Exposure Draft of June 2010 will help NASBP formulate comments that must be submitted by October 22, 2010. Please provide your comments to NASBP and describe your concerns about this proposal.

Learn More
NASBP Members, affiliates and associates are encouraged to register for the complimentary NASBP Virtual Seminar that will address the Exposure Draft and its impact on the preparation of contractor financial statements. The complimentary Virtual Seminar is scheduled for Friday, September 10 at 2 pm EDT. Register by clicking here.

For more background information about the issue and the comments that CFMA and NASBP submitted in June 2009 on a discussion and proposal paper that IASB/FASB issued on this topic, visit the NASBP micro site on the topic by clicking here.