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Topic 606 - yesterday's presentation

  • 1.  Topic 606 - yesterday's presentation

    Posted 25 days ago
      |   view attached
    Yesterday at the end of Lindsey and Randy's excellent presentation on Revenue Recognition, they asked if anyone who has completed the process had any recommendations for those who had not. At Jokake, we have completed our review of contracts at 12/31/18, we still need to finalize documentation of the process and disclosures, but we are 90% complete.

    My recommendation for those that haven't completed the process would be to download your 12/31/18 WIP into an excel file. Then add columns to the spreadsheet for those aspects of the new standard, Topic 606, that apply to your firm. For example, add a column to your WIP spreadsheet for "Do I even have a contract?" and then review your contracts to determine that if they include a termination for convenience clause, does consideration pass for work put in place at the point the owner elects to terminate for convenience; Add a column for variable consideration and then review your contracts for LD clauses or shared savings clauses and then make an assessment of likelihood; Add a column for fulfillment clauses and then review your contracts to determine the impact of start up costs to determine if they are material or not; Add a column for non-standard warranty clauses and then review your contracts to determine if they include that clause; Add a column for multiple performance obligations and then review your contracts to determine if they include multiple performance obligations in the view of the owner, and if they do you can use your WIP spreadsheet to determine the earned revenue and earned profit for each and determine materiality.

    If I had to do it again, I would have ignored contracts that were over 95% complete. Also I would have sorted and grouped the WIP by contract type, for example all JOC contracts, all AIA standard form contracts, etc. I believe that you should read each contract because even standard form contracts are subject to modification by owner's attorneys, and master agreements typically add other documents as part of the contract documents such as task orders, but your CPA may have a different opinion on that so discuss with them.

    I am attaching a copy of Jokake's summary document of our contract review. Hope this is helpful.

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    David Miller CCIFP, CRIS, CTP
    Cfo / Treasurer
    Jokake Construction Services, Inc.
    Phoenix AZ
    (602) 224-4573
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    Attachment(s)

    xlsx
    606 summary review.xlsx   15K 1 version


  • 2.  RE: Topic 606 - yesterday's presentation

    Posted 22 days ago
    Dave -
    As always, thank you for sharing your insight and worksheet summarizing your ASC 606 analysis!   Would you mind sharing with the group more specifics on what unique circumstances are triggering multiple performance obligations and a little deeper explanation of the fulfillment costs you've identified.  Thanks!

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    Jason Switz, CPA, CCIFP
    Chief Financial Officer
    Chasse Building Team
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  • 3.  RE: Topic 606 - yesterday's presentation

    Posted 20 days ago
    As Lindsey and Randy pointed out in their presentation, it is important to view the contract and project from the perspective of the owner. What are they considering as the ultimate deliverable? In 1964 in a Supreme Court ruling regarding obscenity laws, justice Potter Stewart wrote (paraphrasing) I shall not attempt to define the kind of material I would describe as pornographic, however, I know it when I see it, and this is not that. I think that is applicable when it comes to multiple performance obligations, it may be difficult to put a definition to it, however, you will know it when you see it. In my evaluation, I identified two of our projects as constituting multiple performance obligations. One of them was a project we did for American Airlines. We were hired by AA to build parking canopies at their property on Rio Salado Drive in Tempe at building C. We were nearly complete with this work. AA approached Jokake to perform a tenant improvement project for them down the street at building D, interior build out remodel. AA wanted to negotiate the work with Jokake. AA wanted to issue a change order for the TI project rather than go through A rigorous procurement  process. Because the project was physically at a different location, we priced it separately than we would have the canopy project, it involved a completely different subcontractor base, and we had different on site supervision on the TI than the canopy project, I determined for these reasons that in the eyes of the owner, this is a separate deliverable, and would be a separate performance obligation, despite the fact that the owner wanted to issue a change order, so we accounted for it as a separate performance obligation.
    In contrast, we had a contract with Taylor Morrison to perform renovations at their head quarters building. It involved the first and second floors. Later, Taylor Morrison approached us to add additional floors including the executive floor. Since it was an extension of the original work, involved the same subcontractors, same on-site supervision and was priced as a change rather than total separate contract, and in the eyes of the owner, they viewed it as one deliverable, we accounted for that as one performance obligation.
    Regarding fulfillment costs, it really depends upon the type of work. Fulfillment costs are costs to get ready to do the work. As a commercial building GC, we don't have a lot of prep costs, insurance and bonding costs would be included, but our mobilization costs are minimal. When taken into context, insurance and bond costs are immaterial as compared to the full construction costs, for the most part. The important thing to remember is that you can't just say, oh Topic 606 is insignificant or would result in immaterial adjustments, yo9u have to do the analysis and document your process and conclusions and disclose your conclusions.

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    David Miller CCIFP, CRIS, CTP
    Cfo / Treasurer
    Jokake Construction Services, Inc.
    Phoenix AZ
    (602) 224-4573
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