FED GOV CON

Webinar Wednesdays
2019 Series

JSchaus & Assoc.

Washington DC
+1–202–365–0598
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 About Our Speaker:
Don Keninitz, CPA, CGMA
Education:
B.S. Bus. Admin, George Mason
University

Company Name:
E. Ecohen & Co., CPAs

# of Years Federal Gov Con Experience:

40
Basics of New GovCon
Revenue Recognition
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Major Changes are Coming!

The new revenue recognition standard is a game-changer that will have a

major effect on how many government contractors (GCs) report revenue.
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

For GCs with fixed-price contracts, many have relied on the AICPA’s Statement
of Position (SOP) 81-1, “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts”.

Notably, this SOP, originally issued in 1981, was modified many years ago to
specifically exclude service contracts, a fact many GCs are either unaware of or
simply chose to ignore.

Moreover, this SOP was superseded as authoritative GAAP in 2005 when the
Financial Accounting Standards Board (FASB) issued its Codification of GAAP
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

The foregoing notwithstanding, many contractors have continued to use SOP

81-1 as a justification for applying the cost-to-cost percentage of completion
method to fixed-price government contracts.

The issuance of the new revenue recognition standard, formally known as

Accounting Standards Update 2014-09 (ASU 2014-09), will remove any
possibility of simply falling back on cost-to-cost percentage of completion for
fixed price contracts relying on SOP 81-1 or other prior guidance
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Another existing standard that was incorporated into the Codification was
Emerging Issues Task Force (EITF) issuance 00-21, issued in 2000 covering
“Multiple Element Arrangements”

EITF was extremely complicated and was modified several times. It required
companies to analyze all of their revenue-producing “arrangements” (typically
“contracts”) to determine if there were different accounting units that should
be accounted for separately, potentially under different revenue recognition
rules.
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

The new standard, which is effective this year (2019) for private companies
radically changes the way of SOP 81-1 and EITF 00-21, as they were
incorporated into the Codification, operated, as well as other affecting
numerous other elements of the existing revenue recognition guidance
currently found in Accounting Standards Codification (ASC) Topic 605.

While some GCs will experience little change, others will find themselves
substantially impacted by the new standards in ASC Topic 606
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

The new standard is incorporated into the FASB Codification as a new section, Topic
606, which is how I’ll refer to it hereafter. This Topic supersedes most of existing Topic
605 as well as most industry-specific guidance.

It specifically supersedes “some cost guidance included in Subtopic 605-35, Revenue

Recognition – Construction-Type and Production-Type Contracts” (which essentially
replicated much of SOP 81-1, which hasn’t applied to service contracts for years).

Let’s look at some of the ways Topic 606 will affect GCs
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

As a refresher, the core of the new standard is based upon a 5-step approach to
evaluating contracts:

Step 1: Identify the contract(s) with customers

Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation.
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Step 1: Identify the contract(s) with customers

The Topic identifies ”a contract as an agreement between two or more parties

that creates enforceable rights and obligations”

There are 5 basic criteria to be evaluated in determining whether something

constitutes a contract.
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Step 1: Identify the contract(s) with customers

The Topic states that a “master agreement” generally is not a contract within the scope
of Topic 606

That means blanket-purchase arrangements, IDIQ arrangements, etc. may not qualify as
contracts in themselves; instead, individual purchases, task orders, etc. will constitute
contracts, and will be the subject of applying the Topic 606 requirements.

Another question is whether unfunded option years will count as legally enforceable
agreements prior to exercise and funding.
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JSchaus & Associates

Step 2: Identify the performance obligations in the contract

For many GCs, this will be one of the biggest challenges. For example, many contracts
have multiple elements, such as option years, tasks, CLINs, etc. Each of these is
potentially a separate performance obligation.

Topic 606 states holds if more than one good or service is promised, it is a performance
obligation only if it is: 1) distinct, or 2) a series of distinct goods are services that are
substantially the same or have the same pattern of transfer.
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Step 2: Identify the performance obligations in the contract

There are two specified criteria for “distinct”:

1) Capable of being distinct – the customer can benefit from the good or service on its
own

2) Distinct within the context of the contract – the promise to transfer the good or
service is separately identifiable from other promises
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Step 3: Determine the transaction price

The transaction price may hinge in part on things like whether option years are
considered part of one contract, or separate contracts. Incentive and award
fees may also complicate the determination of the contract price.
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Step 3: Determine the transaction price

Elements in determining total consideration include a variety of issues, but the one
most likely to affect GCs is “variable consideration”, which would include award fees,
incentive provisions and the like. The question of how to view option years will also
impact the determination of total consideration, and hence the transaction price.
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JSchaus & Associates

Step 4: Allocate the transaction price to the performance obligations

This may represent a challenge, because under the standard it doesn’t necessary follow
that a separately-priced element of a contract will represent the appropriate allocation
of a portion of the transaction price for that element.

The basic requirement is that for a contract that has more than one performance
obligation, an entity should allocate the transaction price to each performance
obligation in an amount that depicts the amount of consideration to which the entity
expects to be entitled in exchange for satisfying each performance obligation
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Step 4: Allocate the transaction price to the performance obligations

The foregoing is often easier said than done, because of things like – for example –
milestone billings that may be based on the lapse of time (paid at contract intervals)
rather than satisfaction of a particular performance obligation.

It also requires the GC to determine the standalone selling price of each performance
obligation at contract inception.

This area is going to be very complicated for some GCs.

 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation.

The basic requirement is that a performance obligation is satisfied when the

entity transfers a promised good or service to a customer. A good or service is
transferred when (or as) the customer obtains control of that good or service.
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation.

May occur over time, i.e., if one of the following criteria is met:

- Customer simultaneously receives and consumes the benefits provide by the entities
performance
- Performance creates or enhances an asset that the customer controls as the asset is
created or enhanced
- Performance does not create an asset with an alternative use to the entity (provider),
and the entity has an enforceable right to payment for performance completed to date
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation.

May occur at a point in time if:

Indicated by factors such as: entity (provider) has a present right to payment;
customer has legal title to the asset; entity has transferred physical
possession; customer has obtained significant risks and rewards of ownership;
customer has accepted the asset
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation.

Suffice to say that the satisfaction of a performance obligation may occur at a single
point, or my occur over time. This is the step that will likely have the biggest impact on
accounting for fixed-price contracts, where performance takes place over time, but the
performance obligation may not actually occur until task or contract completion. It’s
likely that some contracts that have been traditionally accounted for using percentage-
of-completion will shift to what’s traditionally been known as the completed-contract
method.
 2019 – Fed Gov Con Webinar Series - Washington DC
JSchaus & Associates

Applying the new Topic requires an in-depth of its requirements. The Topic is
lengthy and complex, and many companies will find themselves in need of
professional assistance. Keep in mind that independent CPA firm auditors will
be walking a fine line in providing such assistance, as the CPA firm cannot
remain independent if it participates in making accounting or management
decisions, and the new Topic is going to require a lot of both.
 THANK YOU!
JSchaus & Assoc.
Washington DC
hello@JenniferSchaus.com
www.JenniferSchaus.com
+1–202–365–0598
Speaker: Don Keninitz

Email: dkeninitz@ecohencpas.com