The Financial Accounting Standards Board in conjunction with the International Accounting Standards Board (IASB) has issued an exposure draft, which will likely take effect for fiscal years commencing after January 2015, that addresses revenue recognition. This update to the standard (topic 650) has direct applicability to government contractors and may affect the timing and amount of revenue recognized under long-term contracts. In particular, the updated standard serves to clarify a key element in the recording of revenue, namely; the transfer of ownership and control of the asset or service to the customer. This transfer may occur “over time” or at “point in time”. This is perhaps easily understood for tangible goods but less clear for services.
Does your service contract transfer ownership and control “over time” or at a “point in time”?
Transfer – Transfer over time might be evident if your services create or enhance a customer asset. If it does and the customer controls the asset or directly benefits from the service as it is created then a transfer has taken place. Let’s focus on services. If you are providing staff augmentation for example, the customer is receiving and directly benefiting from the services and a transfer has taken place. The fact that a contractor may have lien rights to compel payment does not matter and effectively the customer has control of the asset or service.
Alternatively, it may not be clear that an asset is controlled by the customer or that an asset is created or enhanced. The Boards resolved this issue by identifying when a transfer did not take place. Circumstances would suggest that if the contractual activity has an alternate use by the contractor and the contractor can redirect the resulting effort to another customer, a transfer has not taken place. If the contractual effort is so highly customized that redirecting the effort to another customer is not possible without significant cost, then the presumption is that an alternate use does not exist. Finally, if no alternate use exists for the contractor’s asset or service, then evidence of transfer might be indicated if another contractor would be required to reperform the work completed to fulfill the contract. If fulfillment of the contract does not require work to be reperformed then the presumption is that the customer received a benefit and a transfer has taken place. For example, if the contractor performed IT services under a long-term contract to provide facility support and the customer were to terminate the contract, reperformance of the contractor’s work would be highly unlikely. Therefore a presumption of benefit and transfer would be supported. Further evidence of benefit and transfer would be supported by the customer’s contractual obligation to pay the contractor (for example, milestone payments as contrasted to deposits).
Transfer and control over time supports the contractor’s basis for utilizing a percentage of completion method of accounting. Otherwise, revenue should be recorded at the time transfer occurs.
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