Financial board updates revenue recognition standard

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which replaced most of the existing guidance with an overriding principle and five-step model. Companies now are instructed to identify contracts with customers; identify performance obligations; determine transaction prices; allocate transaction prices; and recognize revenue.

The updated standard allows revenue to be recognized over time if the following criteria are met:

  • A customer receives and consumes the benefits of the entity's performance as it occurs.
  • A customer controls the asset as it is created or enhanced by the entity's performance.
  • The entity's performance doesn't create an asset with an alternative use to the entity, and a customer doesn't have control over the asset created; however, the entity has an enforceable right to payment for performance completed to date and expects to fulfill the contract as promised.

Roofing contractors should perform general analyses of their contracts to evaluate whether they meet the criteria to recognize revenue over time. If one or more of the criteria are not met, the revenue will be recognized at the time the performance obligation is completed.