BSB - A look at revenue recognition and government contractors

In 2019, the Accounting Standards Update (ASU) 2014-2019 Revenue from Contracts with Customers went into effect across all industries. Since its implementation, it has affected day-to-day accounting related to the execution of contracts with customers. The new revenue recognition standard eliminated the previous guidance under GAAP and replaced it with the following five-step framework:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

With the new standard now fully implemented, its effect on different industries is becoming more apparent. So what does this mean for government contractors?

For one thing, the new standards have necessitated a change to many key revenue recognition processes for government contractor business entities. The type and nature of a contractor’s work have ultimately determined the impact of the new standard.

For some types of contracts, there have been minimal changes. However, as compliance continues, government contractors need to understand the guidelines and take a look at some key areas noted in the AICPA Aerospace & Defense Recognition Task Force:

  • Acceptable Measures of Progress– considerations for determining progress of performance obligations satisfied over time
  • Accounting for Contract Costs– considerations for the incremental costs of obtaining and fulfilling a contract
  • Variable Consideration – considerations for estimating incentive fees, award fees, economic price adjustments, the impact of subsequent modifications, and the best method to determine the amount to include in the transaction price
  • Contract modifications – considerations when evaluating the existence of a modification, determining if a modification should be treated as a separate contract, or how a modification should be treated if included as part of an existing contract
  • Significant Financing Component – considerations to assess whether a significant financing component exists in determining the transaction price for various types of contracts
  • Allocating the Transaction Price -considerations for determining the allocation of a transaction price to multiple performance obligations

Based on the original implementation plan outlined by The AICPA, the following steps should be taken to ensure ongoing compliance.

  • Assign a staff member to study and oversee ongoing implementation. 
  • Continually evaluate the impacts on how your company accounts for different types of revenue streams and contracts. Ensure that any changes in accounting are documented thoroughly.
  • Determine and ensure that the appropriate implementation method is utilized.
  • Ensure that all software application systems are recording revenue recognition under the new standard.
  • Verify that any required interim disclosures have been made.
  • Develop an evolving plan for ongoing implementation, and train staff on all applicable changes.
  • Continue to educate management of the impact to the company’s financial statements.

The full impact of the new standard will become more apparent as implementation continues. The professionals at BSB specialize in accounting and professional services for government contracting and other industries. We understand the new standards and help our clients implement the changes required under current law. Please contact us with questions or concerns about revenue recognition or any other needs.