Revenue Recognition Archives - Cooper, Travis & Company, PLC

Test Your Accounting IQ

Posted on April 18, 2025 by dsp64

Regarding Some Fairly Heavy Topics

Introduction to the Quiz

Are you ready to put your accounting expertise to the test? This quick quiz dives into five significant areas shaping public accounting today — from leasing and credit loss estimates to risk assessments, quality management standards, and revenue recognition. Designed for CPAs with a couple of years under their belts, this quiz challenges your knowledge of recent standards and their real-world application. Answers and brief explanations follow — so you can check your score and sharpen your skills. This quiz covers five complex accounting, auditing, and firm quality management areas relevant to accountants in public practice. The topics include:

Benefits of AI in Audit and Accounting Research

ASC 842 – Leases, which has significantly impacted how companies account for leases;
ASC 326 – Current Expected Credit Losses (CECL), which introduces a forward-looking approach to estimating credit losses;
SAS 145 – Risk Assessment, which enhances audit quality by refining and clarifying the risk assessment processes;
Quality Management Standards (SQMS No. 1, SQMS No. 2, SAS No. 146, and SSARS No. 26), which aim to improve firm-wide quality management systems; and
ASC 606 – Revenue Recognition, which provides a unified framework for recognizing revenue across industries.

The best responses and explanations are provided following the quiz.

Quiz Questions

ASC 842 – Leases

What is the purpose of the lease classification tests under ASC 842?

A) To determine whether leases should be capitalized
B) To decide if leases are finance or operating leases
C) To eliminate lease liabilities from the balance sheet
D) To reassess lease terms annually

Under ASC 842, what happens if a lease meets one or more classification test criteria?

A) It is classified as an operating lease
B) It is classified as a finance lease
C) It is excluded from financial reporting
D) It is classified as a short-term lease

Which test was added under ASC 842 to classify leases?

A) Bargain purchase option test
B) Present value test
C) Alternative use test
D) Lease term test

How does ASC 842 impact transparency in financial reporting?

A) By eliminating lease liabilities from the balance sheet
B) By requiring all leases to be classified as operating leases
C) By reducing disclosure requirements for leases
D) By requiring recognition of Right-of-Use (ROU) assets and lease liabilities

What is considered a key challenge for construction companies under ASC 842?

A) Eliminating ROU assets
B) Reducing lease liabilities on the balance sheet
C) Increasing lease term flexibility
D) Identifying embedded leases in service contracts

ASC 326 – Current Expected Credit Losses (CECL)

What distinguishes CECL from the legacy incurred loss model?

A) CECL estimates losses only when they are probable and estimable
B) CECL incorporates forward-looking information into credit loss estimates
C) CECL eliminates the need for credit loss reserves entirely
D) CECL applies only to large entities

What methodology can construction companies use to estimate credit losses under CECL?

A) Historical write-offs only
B) Solely qualitative assessments without quantitative data
C) Pool-based assumptions incorporating reasonable forecasts of future conditions
D) Ignoring aging categories for receivables

What defines a collateral-dependent loan under CECL?

A) Loans secured by collateral that must be sold immediately upon default
B) Loans secured by high-value collateral without borrower difficulty considerations
C) Loans where repayment depends substantially on the operation or sale of collateral due to borrower financial difficulty
D) Loans excluded from CECL requirements

How are expected credit losses estimated for collateral-dependent loans under CECL?

A) Based on the fair value of collateral adjusted for costs to sell if foreclosure is probable
B) Using historical data only, without considering collateral value adjustments
C) Ignoring fair value considerations entirely in favor of qualitative assessments
D) Using arbitrary percentages assigned by management

Why is CECL important for construction industry financial reporting?

A) It simplifies reporting by eliminating credit loss reserves entirely
B) It reduces reporting complexity by standardizing all methods across industries
C) It enhances transparency by incorporating forward-looking estimates of credit losses across financial assets like receivables and retainage balances
D) It applies only to government contracts

SAS 145 – Risk Assessment

How does SAS 145 refine risk assessment procedures?

A) By eliminating walkthroughs during audits
B) By removing material misstatement considerations
C) By combining inherent risk and control risk into a single assessment
D) By requiring auditors to assess inherent risk and control risk separately

What must auditors evaluate regarding identified controls under SAS 145?

A) Whether controls are designed effectively and implemented properly
B) Whether controls can be ignored during substantive testing
C) Whether controls reduce inherent risk directly
D) Whether controls eliminate material misstatements entirely

What happens if control risk is assessed at maximum under SAS 145?

A) Inherent risk is reduced automatically
B) Control risk is ignored during testing
C) The risk of material misstatement equals inherent risk
D) Audit procedures are terminated

Why did SAS 145 revise the definition of relevant assertions?

A) To eliminate assertions altogether
B) To clarify that assertions are relevant only when there is both a reasonable possibility for the misstatement to occur and a reasonable possibility for it to be material
C) To expand the scope of relevant assertions to include all risks
D) To reduce auditor judgment during testing

What impact does SAS 145 have on audit planning for areas with low inherent risks?

A) Reduced sample sizes, allowing focus on higher-risk areas
B) Increased sample sizes for testing
C) Elimination of testing in low-risk areas
D) Increased documentation requirements

Quality Management Standards

What is the primary objective of SQMS No. 1?

A) To design and implement a proactive, risk-based quality management system tailored to firm operations
B) To eliminate quality management systems altogether
C) To standardize quality management processes across all firms
D) To reduce audit costs by minimizing quality control measures

How do SQMS No. 1 and SQMS No. 2 work together?

A) SQMS No. 1 replaces SQMS No. 2
B) Both standards eliminate the need for quality management
C) SQMS No. 1 is only for small firms, while SQMS No. 2 is for large firms
D) SQMS No. 1 focuses on quality management systems, while SQMS No. 2 addresses engagement quality reviews

What is the role of the engagement partner under SAS No. 146?

A) To reduce professional skepticism
B) To ensure appropriate involvement and quality in audits
C) To eliminate audit documentation
D) To ignore firm policies

How do the new Quality Management Standards enhance firm leadership?

A) By reducing accountability and governance
B) By increasing accountability and governance through a risk-based approach
C) By eliminating technology considerations
D) By ignoring external service providers

What is the impact of SSARS No. 26 on quality management?

A) It reduces the importance of quality management
B) It eliminates the need for engagement quality reviews
C) It aligns with SQMS by enhancing quality management processes
D) It only applies to audits, not reviews

ASC 606 – Revenue Recognition

How does ASC 606 change revenue recognition for construction companies?

A) It eliminates the percentage of completion method
B) It reduces the need for contract modifications
C) It introduces a five-step model to determine revenue recognition timing
D) It only applies to point-in-time revenue recognition

What is the first step in the ASC 606 revenue recognition model?

A) Recognize revenue at a point in time
B) Determine the transaction price
C) Identify the contract with the customer
D) Allocate the transaction price to performance obligations

How do construction companies determine if revenue is recognized over time or at a point in time under ASC 606?

A) Based solely on contract duration
B) Based on whether the customer receives benefits as work is performed
C) Based on the type of construction project
D) Based on the contractor’s preference

What is a key challenge in applying ASC 606 to construction contracts?

A) Determining the transaction price
B) Identifying performance obligations and their satisfaction timing
C) Ignoring contract modifications
D) Reducing costs to obtain and fulfill contracts

Why is collaboration between accounting and project management teams important under ASC 606?

A) To reduce project costs
B) To increase audit risks
C) To eliminate the need for contract reviews
D) To ensure accurate revenue recognition and reflect the financial status of projects

Best Responses and Brief Explanations

B) To decide if leases are finance or operating leases.
ASC 842 uses classification tests to determine if a lease is a finance lease or operating lease.
B) It is classified as a finance lease.
If a lease meets one or more of the classification criteria, it is classified as a finance lease. Otherwise, it is classified as an operating lease.
C) Alternative use test.
Is the asset so specialized that it is only useful to the lessee is one of the criteria used to classify leases under ASC 842.
D) By requiring recognition of Right-of-Use (ROU) assets and lease liabilities.
ASC 842 enhances transparency by recognizing ROU assets and lease liabilities on the balance sheet.
D) Identifying embedded leases in service contracts.
Identifying embedded leases is a key challenge under ASC 842 because they are often disguised and not referred to as leases.
B) CECL incorporates forward-looking information into credit loss estimates.
CECL introduces a forward-looking approach to estimating credit losses, and credit losses are recognized even if the possibility is remote.
C) Pool-based assumptions incorporating reasonable forecasts of future conditions.
CECL allows for pool-based assumptions that incorporate future conditions.
C) Loans where repayment depends substantially on the operation or sale of collateral due to borrower financial difficulty.
This defines a collateral-dependent loan under CECL.
A) Based on the fair value of collateral adjusted for costs to sell if foreclosure is probable.
Expected credit losses for collateral-dependent loans are estimated based on collateral value.
C) It enhances transparency by incorporating forward-looking estimates of credit losses.
CECL improves financial reporting by incorporating future expectations.
D) By requiring auditors to assess inherent risk and control risk separately.
SAS 145 mandates separate assessments for inherent and control risk.
A) Whether controls are designed effectively and implemented properly.
Auditors must evaluate whether controls are effective and properly implemented.
C) The risk of material misstatement equals inherent risk.
If control risk is maximum, the risk of material misstatement equals inherent risk
B) To clarify that assertions are relevant only when there is a reasonable possibility for the misstatement to occur and a reasonable possibility for it to be material.
SAS 145 clarifies relevant assertions to enhance audit risk assessments.
A) Reduced sample sizes, allowing focus on higher-risk areas.
SAS 145 allows for reduced testing in low-risk areas, focusing on higher-risk ones.
A) To design and implement a proactive, risk-based quality management system tailored to firm operations.
SQMS No. 1 aims to create a customized quality management system.
D) SQMS No. 1 focuses on quality management systems, while SQMS No. 2 addresses engagement quality reviews.
Both standards work together to enhance quality management.
B) To ensure appropriate involvement and quality in audits.
The engagement partner ensures quality and involvement in audits under SAS No. 146.
B) By increasing accountability and governance through a risk-based approach.
The new Quality Management Standards enhance firm leadership by increasing accountability.
C) It aligns with SQMS by enhancing quality management processes.
SSARS No. 26 aligns with SQMS to enhance quality management.
C) It introduces a five-step model to determine revenue recognition timing.
ASC 606 introduces a five-step model for revenue recognition.
C) Identify the contract with the customer.
The first step in ASC 606 is identifying the contract with the customer.
B) Based on whether the customer receives benefits as work is performed.
Revenue is recognized over time if the customer receives benefits as work is performed.
B) Identifying performance obligations and their satisfaction timing.
Identifying performance obligations is a key challenge under ASC 606. However, a robust case can be made for A) Determining the transaction price.
D) To ensure accurate revenue recognition and reflect the financial status of projects.
Collaboration between accounting and project management teams helps ensure accurate revenue recognition under ASC 606.

How Did You Score?

Whether you aced it or picked up a few new insights, staying sharp on these evolving standards is key to staying ahead in public accounting. If you’d like to dive deeper into any of these areas, reach out to our team — we’re always here to help navigate the complexities.

ASC 606-Revenue Recognition-Uninstalled Materials

Posted on June 21, 2023June 21, 2023 by dsp64

Living in a Material World

We’ve worked with the revenue recognition standard under ASC 606, Revenue from Contracts with Customers, for a few years now. How’s it going? Pretty good? Well, now may be an excellent time to reexamine a somewhat dubious but significant area of the standard.

This article will examine revenue recognition for materials cost related to a construction contract. Specifically, we will discuss critical factors that impact how a contractor who uses the cost-to-cost input method recognizes revenue associated with uninstalled materials.

The FASB has an underlying concern that cost-to-cost revenue recognition could result in an overstatement of revenue. ASC 606-10-55-21 points out a potential shortcoming of the cost-to-cost method input method. There may not be a direct relationship between the cost charged to the contract (the input) and the transfer of control of goods or services to the customer, resulting in an overstatement of revenue. For example, significant uninstalled materials charged to job cost may not be indicative of progress toward project completion and thus result in an overstatement of revenue.

It’s a Matter of Control. ASC 606-10-25-23 states that entities (contractors) recognize revenue as it satisfies performance obligations by transferring a promised good or service (i.e., an asset) to the customer. It further states that assets are transferred when (or as) the customer obtains control of the asset.

Under ASC 606, depending on when control of the materials passes to the customer, uninstalled materials are accounted for and presented in one of three ways:

When Control has not Passed. Generic uninstalled materials, even those transferred or delivered directly to the job site, for which control has not been transferred to the customer, should be accounted for as inventory on the contractor’s balance sheet in accordance with ASC 330. Contract revenue (including profit) and cost are not recognized if control has not passed to the customer.
When Control has Transferred, but Materials Not Installed. When control of the uninstalled materials (located in the contractor’s shop or at the job site) has passed to the customer, but the materials remain uninstalled, the contractor may recognize contract revenue, but only to the extent of the cost of the materials. No profit can be recognized before installation. ASC 606-10-55-21suggests that such an adjustment to the cost-to-cost input method may be required in the following circumstance:

When a cost incurred is not proportionate to the entity’s progress in satisfying the performance obligation. In those circumstances, the best depiction of the entity’s performance may be to adjust the input method to recognize revenue only to the extent of that cost incurred. For example, a faithful depiction of an entity’s performance might be to recognize revenue at an amount equal to the cost of a good used to satisfy a performance obligation if the entity expects at contract inception that all of the following conditions would be met:

The good is not distinct.
The customer is expected to obtain control of the good significantly before receiving the services related to the good.
The cost of the transferred good is significant relative to the total expected costs to completely satisfy the performance obligation.
The entity procures the good from a third party and is not significantly involved in designing and manufacturing the good.

An excellent example of how to account for uninstalled materials when control of the materials has passed to the contract owner is found at Example 19- ASC 606-10-55-187 through 192.

Control has Transferred, and Materials are Installed. The contractor may include the cost of the materials in the input method and fully recognize the cost and revenue, including profit.

Transfer of Control. ASC 606-10-25-25 states that:

(c)ontrol of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

When, exactly, does control of materials transfer to the customer? Unfortunately, there is no simple answer. Like many things in life, the answer is maybe yes, maybe no, it ain’t necessarily so.

In short, control of the materials transfers to the customer when ownership transfers to the customer. And in our federalistic system, property ownership laws vary from state to state. It varies and is, therefore, complicated. Depending on the jurisdiction, ownership of the materials may transfer upon delivery to the job site; the transfer may be upon billing the materials, or the ownership transfer may be upon collection of the billing. And lien laws come into play that may determine the point when material ownership transfers from the contractor to the customer. The contract itself may stipulate when the transfer of ownership happens. Sorry, there is no boilerplate black-letter answer. Nevertheless, to properly recognize and account for revenue, it is essential to understand at what point ownership of the materials passes to the customer.

Because of this complexity, you should only travel this path when required. That is when doing so is necessary because it significantly affects revenue measurement which may not be indicative of progress toward project completion.

What About Material Designed and Manufactured by the Contractor?

Such materials should be charged directly to contract costs, and revenue (including all profit) should be recognized using standard cost-to-cost percentage of completion computations.

What About General Contractors or Prime Contractors?

Even general or prime contractors may find they are not exempt from the rules related to uninstalled materials. If the general or prime contractor has subcontractors with significant uninstalled materials whose costs are then billed to the general or prime contractor, those pay items may have to be excluded from their percentage of completion calculation in the manner discussed above.

Revenue Recognition For Contractors

Posted on February 16, 2023February 16, 2023 by dsp64

Does it Seem Easier Now?

Now that contractors have a few years of practical experience working with the revenue recognition standards under ASC 606, does it seem a bit friendlier than expected? Perhaps so. Or maybe it seems that way because we’ve been working with it for a while now.

We thought this would be an excellent time to review a few significant tenants of the standard. After working with ASC 606 for a time, a refresher of pivotal provisions may help solidify our understanding. So briefly–here we go.

Remember the five steps?

Identify the contract(s) with a customer
Identify the performance obligation(s)
Determine the transaction price
Allocate the transaction price to the performance obligations
Recognize revenue when (or as) performance obligations are satisfied.

Identify the Contract. For a contractor, identification of a contract is usually the easy part. It’s in the name– right? Unfortunately, a contractor’s contract may be a mountain of documents, including the core contract, specs, drawings, and many change orders. Or depending on the nature of the contractor’s business, it may be very sketchy and driven by purchase orders. Nevertheless, if there’s a meeting of the minds between two or more parties and it creates enforceable rights and obligations – you have a contract. However, to recognize revenue under ASC 606, all of the following must be met:
- It has the approval and commitment of the parties
- Rights are identified
- Payment terms are identified
- It has commercial substance, and
- The collectibility of substantially all consideration is probable. Probable means it is likely to be collected.
What does “likely to be collected” mean? From a practical viewpoint, if the likelihood of collection is 75% or better, many practicing accountants consider the probable threshold met.

When should the contractor reassess collectability? Question 10 of the FASB’s Revenue Recognition Implementation Q&As (January 2020) (FASB Q&A) addressed this question. There must be a significant change in the customer’s ability to pay before the contractor reassess whether revenue recognition must stop.
Identify the performance obligation(s). Are the costs of pre-production activities included in the percentage of completion (POC) measurement? For example, consider the cost of mobilizing equipment, labor mobilization, and construction of a temporary site office. Do those activities provide goods or services impacting POC revenue recognition? Also, what about pre-construction design services? Do such cost activities transfer a service measured under the POC calculation?
The FASB Q&A attempts to shed some light on this. Question 16 is as follows: How should an entity assess whether pre-production activities are a promised good or service (or included in the measure of progress toward complete satisfaction of a performance obligation that is satisfied over time)?

The pre-production activity will enter into the POC measurement if the activity is a promised good or service. However, if the activity does not transfer a good or service to the customer, it is not included in the POC measurement.

Whether or not to include pre-production activities in the POC measurement is a matter of judgment. Consider whether there has been a transfer of goods or services to the customer. Suppose mobilization is a line item on the schedule of value, whereby the company has the right to payment for its cost plus a reasonable profit. In that case, mobilization represents progress toward completion because it is a contractual promised good or service, as evidenced in the contractual schedule of values.

On the other hand, if the site office is not included in the schedule of value, its cost probably doesn’t transfer a good or service to the contract owner. Therefore, it would not be a cost included in the POC revenue measurement.

An acid test that the FASB Q&A offers is whether control of the good or service is ever transferred to the customer. The overriding question is whether the customer simultaneously receives and consumes the benefits provided by the construction company. For example, if pre-construction design drawings are provided to the contract owner, the owner has received and consumed the benefit. This is because he has the drawings in hand and under his control. Therefore, the cost of the design services would impact the POC calculation.
Determine the transaction price. Due to the nature of construction contracts, estimating total revenue at completion is complex. Much of the complexity relates to variable consideration. Variable consideration can take many forms. For example, variability can relate to performance bonuses, incentive payments, liquidated damages, unpriced change orders, and contract claims.
ASC 606 provides two methods for estimating variable consideration.
1. Expected value approach
2. Most likely amount approach
The choice of approach is not an election. Instead, the company can select whichever method is expected to predict the amount better.

After estimating variable consideration, the company must consider the revenue recognition restraints. Then, based on an evaluation of those restraints, variable consideration is included in the transaction price when it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty is resolved. In other words, the contractor includes the amount they expect to be entitled to in the transaction price.
Allocate the transaction price to the performance obligations. This step is required if you identify more than one performance obligation embedded in the construction contract. In that case, the contract price will be allocated between the several performance obligations.
On the other hand, the contractor may find that many complex tasks in a contract intertwine into a single performance obligation. This happens when the contractor provides a significant service of integrating a complex set of tasks and components into a single project.
Recognize revenue when (or as) performance obligations are satisfied. For a contractor, the question is, at inception, will revenue recognition be over-time or at a point in time? To decide this, the company must first determine if the revenue stream meets the over time recognition criteria. If not, then revenue is recognized at a point in time by default.
ASC 606 provides three criteria to determine if control of a good or service transfers to the customer over time. If any of the criteria described below are met, revenue recognition is over time. If none of the criteria below are met, revenue is recognized at a point in time.
1. The customer simultaneously receives and consumes the benefits as the company performs.
2. The customer controls the asset as it is created or enhanced by the company.
3. The company creates or enhances an asset that has no alternative use to the company, and the company has a right to be paid for work completed to date.
An example of the first criterion noted above would be hauling services. If the customer contracted for materials to be hauled from Nashville to Memphis, it’s likely that the customer simultaneously receives and consumes benefits as the trucker performs (over time). Why? If the truck breaks down at Bucksnort 60 miles up Interstate 40, the customer could (theoretically, anyway) hire another nearby trucker to haul the materials for the remainder of the route. The replacement trucker would obviously not be required to repeat the trip from Nashville to Bucksnort. That means the customer both received and consumed the benefit of the materials being hauled from Nashville to Bucksnort.

An example of the second criterion would be a commercial building constructed on real property owned by the customer (contract owner). As the contract owner is progress billed, he accepts control of the asset as work is completed in stages. That’s the justification for percentage-of-completion revenue recognition and, for that matter, progress billing. It’s revenue recognition over time.

The third criterion can be illustrated as follows. The contractor has a long-term contract with the U.S. Department of Energy for civil construction on a project unique to the Department’s classified purpose. Therefore, the contractor has no alternative use for the asset under construction. Additionally, if the DOE halted construction after 50% completion, the contractor has a contractual right to payment for the work completed. Accordingly, revenue recognition will be measured over time.