Navigating the Path to

Implementation:Engineering &

Construction

The effective date for the new revenue recognition standard, ASC 606, Revenue from Contracts with Customers, is fast approaching. For public companies, the new standard is required to be implemented in 2018, and 2019 for private companies. However, depending on the transition method selected and the number of years presented in financial reporting, its impact might already affect your financial statements.

Have you considered the following:

` Are you prepared and ready for implementation?

` Do you know how your entity’s revenue recognition and disclosures will be impacted?

` Do you know how your entity’s processes and controls will change?

The Road to Revenue Recognition

How Can We Help?

Step 1: Understand Your Products and Services

` General diagnostic discussion with management;

` Review a sample of your customer contracts for stated deliverables; and

` Assist you in identifying entity- and industry-specific implied deliverables.

Step 2: Understand Your Current Policies and Processes

` Review current legacy GAAP policies and practices;

` Update our understanding of current processes and controls;

` Update our understanding of current IT systems;

` Understand reports and data that are currently available; and

` Review current financial reporting and disclosures.

Step 3: Assist You in Analyzing Revenue Recognition Under ASC 606

` Provide and discuss authoritative guidance;

` Provide and discuss interpretive guidance including FASB and AICPA interpretations;

` Review public company filings for comparable companies in similar industries;

` Brainstorm with your company to assist you in identifying performance obligations, variable consideration, discounts, financing components, standalone selling prices, when control is transferred and measures of progress towards completion;

` Disaggregate into inventory of ASC 606 revenue streams; and

` Review your ASC 606 GAAP policies and practices.

Step 4: Assist Management in Identifying Potential Needs

` Compare and contrast current accounting policies and practices under legacy GAAP to ASC 606;

` Assist in identifying changes to the amount and timing of revenue recognition;

` Assist in identifying additional disclosures;

` Assist in identifying additional reports and data needed; and

` Compare and contrast the ability of the entity’s current processes and controls and IT system’s to meet the needs of ASC 606.

Step 5: Assist Management in Identifying Other Potential Impacts

` Analyze potential impact on debt covenants;

` Analyze potential impact on compensation agreements;

` Assist management in determining the most appropriate transition method;

` Identify those contracts which will be “open” upon transition; and

` Assess the potential tax impact.

Step 6: Implementation

` Access to our referral network of professionals that can manage the implementation process.

` Access to our Firm’s IT system partners (SAP, Oracle, Microsoft Dynamic, Deltek, etc.), if IT system changes are required.

Engineering & ConstructionThe new standard will affect how all industries evaluate and document revenue recognition, and depending on your company’s industry, the new standard could have a material impact on the amount, timing and pattern of revenue.

Impact of New Standard

Impact Description

Change Orders

Change orders, amendments or modifications must be analyzed to determine if they contain additional goods/services, whether those additional goods/services are both capable of being distinct and distinct from the goods/services in the original contract and previous modifications, and whether those additional goods/services are being sold at their standalone selling price (SSP). In addition, unpriced change orders will require management to estimate the expected price of the change order.

Combining Contracts

Contracts with different customers may no longer be combined, even if the contracts are economically linked. Management will need to carefully assess which parties are customers and whether contracts to the same customer meet certain criteria that requires the contracts to be combined.

Impact Description

Segmentation

Contracts that are currently segmented might no longer be segmented. In particular, this will require significant judgment for contracts that contain engineering, procurement and construction (EPC). Contract segmentation is replaced with the concept of “performance obligations.” Contracts must be separated into different units of accounting called performance obligations if the goods/services promised are both capable of being distinct and distinct from one another (distinct within context of the contract). In addition, breaking a contract up into different performance obligations is not optional like segmenting was.

Variable Consideration

Entities are now required to estimate variable consideration at contract inception and, if certain criteria are met (i.e., variable consideration constraint), this could result in recognizing variable consideration earlier, before the contingency is resolved, compared to legacy GAAP. This will impact entities with incentive payments (possible increases to revenue), penalties (possible decreases to revenue), unpriced change orders, and claims and liquidated damages (possible decreases to revenue). In addition, for those contracts with multiple performance obligations, it could be challenging to determine if the variable consideration should be attached to one particular performance obligation or spread out among all of the performance obligations.

Impact Description

Significant Financing Component

Long-term contracts (> 1 year) will need to be assessed to determine whether they provide the customer, or the customer provides the entity, a significant financing component which will be accounted for as a separate unit of accounting and could result in additional interest revenue or expense and change total revenue recognized. Companies will need to assess the timing of customer payments in relation to the transfer of goods or services. A difference in the timing of when payments are made in relation to when goods and services are transferred could indicate that a contract contains a significant financing component. Retainage, could but often will not, result in a significant financing component. Either way, management will have to assess.

Customer Provided Materials (e.g., materials or equipment)

If the contractor obtains control of these materials or equipment, then the fair value of those materials or equipment should be included in the transaction price. In addition, the rules governing principal versus agent have changed and could result in different gross versus net conclusions.

POC & Completed Contract Methods

The terms percentage of completion (POC) and completed contract are gone, and now management must assess each performance obligation in each contract and determine whether the performance obligation is recognized over time or at a point in time. If recognized over time, then management must determine the most appropriate method to measure progress towards completion using either an input or output method. The company should consider the nature of the products/services provided and contractual terms, such as termination rights, payment provisions, and legal title to work in process in determining whether to recognize revenue over time or at a point in time. If revenue should be recognized over time the company must consider the best input or output method for measuring progress toward satisfaction. 606 requires entities to use only a single method to measure progress for each performance obligation. It may be challenging to identify the best measure of progress when the individual goods/services are combined into a single performance obligation and transferred at different times such as contracts with combined engineering, procurement and construction (EPC).

Units Produced, Units Delivered,

and WIP

Companies that currently use the units produced or units delivered methods, and have significant work in process (WIP) that is controlled by the customer or is significantly customized, will likely have to change their method of measuring progress towards completion.

Significant Uninstalled Materials

Significant uninstalled materials might need to be removed from the measure of progress towards completion and recognized at zero margins.

Mobilization and Pre-contract Costs

Contractors will no longer be able to defer costs (of fulfillment) if the related performance obligation is recognized over time. Mobilization and pre-contract costs, however, might require capitalization. These costs are differentiated from the cost of fulfillment, which require immediate expensing, based on whether the costs provide a service to the customer or are simply preparing the contract to provide services.

What we CAN do for current or prospective attestation clients*:

` Hold diagnostic discussion with management;

` Provide and discuss authoritative guidance;

` Provide and discuss interpretive guidance including FASB and AICPA interpretations;

` Review public company filings for comparable companies in similar industries;

` Assist in disaggregating revenue into revenue streams;

` Review a sample of customer contracts and assist management in identifying contractually stated performance obligations;

` Assist management in identifying entity– and industry–specific implied performance obligations;

` Hold brainstorming sessions with management to assist in identifying variable consideration, discounts, financing components, standalone selling prices, when control is transferred and measures of progress towards completion;

` Assist in identifying changes to the amount and timing of revenue recognition;

` Assist in identifying additional disclosures;

` Assist in identifying additional reports and data needed;

` Review management’s ASC 606 GAAP policies and practices;

` Compare and contrast the ability of the entity’s current processes and controls and IT system’s to meet the needs of ASC 606;

` Analyze potential impact on debt covenants;

` Analyze potential impact on compensation agreements;

` Assist management in determining the most appropriate transition method;

` Identify those contracts which will be “open” upon transition;

` Our tax professionals can assist in assessing the tax impact;

` Provide access to our referral network of professionals that can manage and perform the implementation process;

` Provide access to our Firm’s IT system partners (if IT system changes are necessary.

* Permissable services require Management to agree to evaluate the adequacy of all services provided and accept responsibility for the results of these services.

Non-permissible consulting services for ALL current and prospective attestation clients:

` Making decisions on behalf of management.

` Managing or performing a new accounting standards adoption project.

` Selecting accounting policies or accounting positions.

` Drafting accounting policies and manuals.

` Calculating amounts and related journal entries.

` Designing and/or implementing manual or IT processes for the application of new or revised accounting literature.

cbh.com

Roy Amler, CPA Partner, Assurance Services

ramler@cbh.com

Chase Wright, CPA Partner, Assurance Services

cwright@cbh.com

Michael Hoose, CPA Senior Manager, Assurance Services

mhoose@cbh.com

Next StepsCherry Bekaert’s dedicated team of professionals can help you navigate how the new standard affects

your company’s processes, data, systems and controls.

Now is the time to plan and adequately prepare for changes that will impact your business.

Let us be your guide forward

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