Accounting for Contracts in the Construction Industry: Possible Impacts of the New Revenue Recognition Standard

• In Event: Emerging Research and Research Interaction 4

Abstract

The revenue recognition standard will have a tremendous impact on how U.S. companies recognize revenues for services and products provided to their customers. One group of companies that is going to be impacted the most by the standard is the construction industry. Currently companies in this industry are allowed to use either the percentage-of-completion or the completed contract method to recognize revenues from long-term construction contracts. While the completed contract method does not require any estimates or judgments to be made, it does defer the recognition of revenues until the contract has been completed which may understate revenues for the companies in this industry, which is why the percentage-of-completion method is more often used. This method, however, has the ability for companies to overstate the revenues recognized in each year since they have to estimate the completion progress in the contract which being subjective is capable of being manipulated by the companies. The new standard will require companies to tie the recognition of the revenues to elements in the contract and hence will only allow companies to recognize revenues when the contractual provisions or benchmarks are met. The purpose of this paper is to examine the impact the new standard will have on the reporting earnings of companies in this industry and the possible reduction in reported profits that may result. The results of our paper will be useful for policy makes to examine if the proposed benefits of the new standard will be achieved. The results will also help companies in this industry to better negotiate the contract terms with their customers in future.

Authors

• Shifei Chung, Rowan University

• Ramesh Narasimhan, Montclair State University