18 BWD | Fall/Winter 2016-2017
Tax implications of the revenue
recognition standard
By Carol Wright, CPA, and Liesl Morelli, CPA
The good news is that the new revenue recognition standard represents a single model to
replace industry-specific — and often inconsistent — rules. The not-so-good news is that
the tax implications of this development can be perplexing.
Today, contractors usually account for a contract as a single performance obligation. Under
the new standard, however, within certain contracts two or more distinct performance
obligations may be identified that must be accounted for separately.
Suppose, for example, that a contract calls for you to construct a building and to supply and install certain
equipment. Depending on the facts and circumstances, the contract may be divided into two performance
obligations. This would require you to allocate the transaction price between construction and equipment
installation, and to recognize revenue from each separately.
The new standard may also affect accounting for long-term contracts. Typically, contractors use the percentage-ofcompletion method to recognize revenue over the life of a project. Under the new standard, revenue is recognized
when control of a good or service is transferred to the customer. Depending on several factors, control may be
transferred when the contract is complete or it may be transferred gradually over the life of a contract.
Other areas potentially affected by the new standard include contract-related costs, change orders, collectability,
uninstalled materials, claims and warranties.
Here are a few more examples of how the new revenue recognition standard may affect taxes and tax planning.
Acceleration of taxable income. Under certain circumstances, revenue recognition for tax purposes is required to
align with its treatment for financial reporting purposes.
So, if application of the new standard accelerates revenue recognition for financial reporting purposes, it may also
accelerate recognition of taxable income. Suppose, for example, that your contracts call for advance payments.
Generally, for tax purposes, advance payments are included in taxable income in the year they’re received. But
there’s a limited exception. This limited exception allows you to defer tax on advance payments for goods and
services for one year, to the extent they are deferred in your audited financial statements.