The Most Important Line Item in a Government Contactor’s Financial Statement

Revenue has been widely recognized as the most important item in a government contractor’s financial statement. Now, with the most recent Financial Accounting Standards Board (FASB) vote, there is a move to a different set of rules for calculating that amount.

On November 6, 2013, the FASB voted to move forward with preparing a final standard on revenue recognition. The final standard is expected to be issued during the first quarter of 2014. This proposed standard could significantly change U.S. GAAP and increase the level of judgment for application in some areas beyond what current industry-specific guidance prescribes.

Some notable areas that could affect government contractors:

• On some occasions, multiple goods or services will be treated as separate performance obligations and, at other times, they will be bundled together as a single performance obligation.
• Amounts determined to be subject to significant revenue reversal should not be included in the transaction price.
• Entities that do not meet the practical expedient will be required to consider the time value of money for situations that have a significant financing component.
• Revenue will be recognized when control of the goods or services is transferred.

The vote authorized the FASB staff to prepare and issue a ballot draft of the standard. The ballot draft will be submitted to the FASB for final approval. Once approved, the final standard will be published as part of the FASB Accounting Standards Codification. The final standard is expected to take effect for public companies in 2017 and for private companies in 2018.

The proposal aims to get rid of the myriad industry-specific revenue standards in U.S. GAAP and provide a single way for all companies to report sales. The crux of the proposed standard is that businesses will report revenue in the amount in which they expect to receive it. Business will follow five steps to determine the amount of revenue they recognize:

• Step 1: Identify the contract with a customer
• Step 2: Identify the separate performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the separate performance obligations in the contract
• Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

The FASB’s objectives with the standard were to create a comprehensive framework for revenue recognition, simplify financial statements and disclosures, and be able to compare across the world and industries.

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