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.
Below is an example of the application of the new standard to a contract with liquidated damages for the expected value method:
- A contractor enters into a contract with a customer to construct a commercial building for fixed consideration of $10 million.
- The construction of the building is a single performance obligation that is satisfied over time.
- The contract requires achievement of substantial completion 104 weeks after receipt of the notice to proceed and assesses $20,000/day in liquidated damages for each day substantial completion exceeds the target.
Based on past experience, the contractor incurs liquidated damages on contracts according to the probabilities in the following table: