There is a new Revenue Recognition standard that will need to be implemented for annual reporting periods beginning on or after December 15, 2018. The standard affects all entities—public, private, and not-for-profit — that record transactions using GAAP.
Construction contractors often encounter Award Fees which are seen as Variable Consideration. With the new revenue recognition standard, those types of situations may be recorded differently than the current practice.
Below is an example of the application of the new standard to a contract with Variable Consideration Award Fees:
Facts:
A contractor enters into a contract for the expansion of an existing two-lane highway into a three-lane highway. The contract price is $65 million plus a $5 million award fee if the expansion is completed before the holiday travel season. The contract is expected to take one year to complete. The contractor has a long history of performing this type of highway work. If the job is not finished before the holiday travel season, the contractor receives no award fee.
The contractor believes, based on its past experience, that it is 95% likely that the contract will be completed in advance of the holiday travel season.
How should the contractor account for the award fee?
Analysis:
The award fee is variable consideration, which must be estimated by the contractor to determine the total transaction price. The contractor is likely to conclude, given the binary nature of the award fee (that is, the only possible consideration amounts are $65 million or $70 million), that
the most likely amount method is the best predictor of the amount of variable consideration to include in transaction price. Given the contractor’s expectation for receiving the award fee,
the contract’s transaction price would be $70 million – the fixed contract price of $65 million plus the $5 million award fee (most likely amount). This estimate would be regularly reassessed and adjusted, as appropriate, if the expected outcome changes from initial expectations.
