December 5th, 2024
Posted on November 23rd, 2023 in General Business
The Accounting Standards Board has issued significant application guidance for entities utilizing the percentage of completion method (POC) for revenue recognition under Canadian Accounting Standards for Private Enterprises (ASPE). This will specifically affect the construction industry since the POC is utilized in accounting for revenue on long term contracts. Also, there are new disclosure requirements outlined in the ASPE revenue recognition standard which mandate specific details that companies operating in the construction sector must now include in their financial statements.
With the enhanced guidance issued, entities should review their existing methods to ensure they are following the new requirements. Entities will want to evaluate their methods to ensure they have selected the appropriate basis for progress measurement, the type of costs for inclusion in the POC calculation (such as whether it is appropriate to include uninstalled materials or equipment when an input method is used) and the method of calculating amounts of revenue and costs recorded in the reporting period. Identifying contract costs and reviewing your process to allocate general costs to a specific contract will be an important consideration under the new amendments. Lastly, entities should review their processes to compare total contract costs to expected contract revenue and recognize an expected loss when total contract costs exceed contract revenue.
The additional guidance added specific disclosure requirements to Section 3400 of the ASPE Accounting Handbook for any contracts accounted for using the percentage of completion method. These new disclosures provide users of the financial statements with information regarding the significant estimates and assumptions involved in calculating revenue using this method. An enterprise is required to disclose each of the following for contracts in progress at the end of the reporting period accounted for using the percentage of completion method: (a) The method or methods of measuring the degree of completion; (b) The aggregate amount of costs incurred and recognized profits (less recognized losses) to date; (c) The aggregate amount of advances received; (d) The aggregate amount of holdbacks withheld; and (e) Uncertainties affecting the measurement of the degree of completion. These disclosures are required for entities with fiscal year ends beginning on or after January 1, 2022. These new disclosures make take time and effort to accumulate this information.
If you need assistance with implementing these amendments and new disclosure requirements, please reach out to your trusted advisor at DJB.
Included is an article authored by RSM Canada, some helpful insights on the percentage of completion method.
Article written by RSM Canada and referenced with permission as a member of RSM Canada Alliance.
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