A manufacturer’s current accounting policy related to revenue recognition could change in the upcoming months with the recent passage of new revenue recognition standards by the Financial Accounting Standards Board.  Previously, the standards treated contract and other manufacturing arrangements as product sales resulting in revenue recognition at a point in time when the manufactured goods are shipped or delivered to the customer.  Under the new standard, effective for annual reporting periods beginning after December 15, 2018, a manufacturer producing goods uniquely designed to a customer’s specifications could be required to recognize revenue over the production period instead of when items are shipped.  This potential switch in revenue recognition would be akin to percentage of completion accounting.

The new standard requires revenue recognition over the production period if the manufactured goods have no alternative use to the manufacturer, and the manufacturer has an enforceable right to payment for the performance completed to date.  An enforceable right to payment exists if the manufacturer would be entitled to payment of costs plus a reasonable margin on the work performed to date if the customer were to terminate the contract early for reasons other than the manufacturer’s failure to perform as promised.

Manufacturers will need to carefully evaluate its contracts related to work in progress, finished goods, fulfillment arrangements, or other specialty manufacturing arrangements to ascertain if an “enforceable right to payment” exists. In our experience, most manufacturing contracts contain cancellation clauses with certain rights to payments from customers, thereby meeting this criteria for accelerating revenue recognition under the new standard.

Manufacturers who are affected by the new revenue recognition standard could potentially have to change business processes, implement additional internal controls over financial reporting, or alter accounting procedures to ensure revenue is properly recognized in their interim and annual financial statements.

Carlson Advisors understands the complexities and implementation challenges the new revenue recognition standard may cause manufacturers and is able to give the insight and analysis you need in order to ensure proper adoption of the standard.  If you have any questions on this subject, or would like additional information, please contact a Carlson Advisors representative at 763-535-8150.

Matthew Wills, CPA, is an Audit Manager and Dawn Polfliet, CPA/ABV is an Audit Partner in our Minneapolis office with industry focuses in manufacturing.  Both are responsible for overseeing attest engagements and business consulting for companies up to $100 million in revenue.