Understanding Variable Consideration Under the New Revenue Standard March 28, 2019 By: Claudia R. WolterPrivate entities under the new revenue standard need to consider the impact of variable consideration. This significant change from prior GAAP guidance requires entities to evaluate certain factors to determine the amount of revenue to recognize. Thus, it is now important to actively review your “transaction price” in that the contract price is impacted by the amount of variable consideration. The most common instances of variable consideration include:Change orders (approved or unapproved)ClaimsBonuses or incentivesLiquidating damages or penaltiesA significant financing component (where performance doesn’t materially match the cash flow between the parties) Noncash considerationConsideration payable to customersWhen you have these items of variable consideration, you need to adjust your contract price (increase or decrease) to the extent of the variable consideration subject to the constraint guidance. The guidance indicates you do not want to encounter a “significant reversal of revenue”.There are two methods whereby you recognize variable consideration:The most likely amount approach – “all or nothing”If the performance obligation is met, you receive the incentiveIf it is not met, you receive nothingYou can include the maximum amount based on prior judgment and experienceThe expected value approachYou determine the expected range of valuesEvaluate based on prior experience and judgmentUse a probability weighted calculation that has a probable chance of collectionThis estimate may require the application of significant judgement. Companies should ensure they have the appropriate controls in place and understand how to implement them (link to implementation article on Variable consideration). KatzAbosch has individuals experienced in contractor issues and trained in process improvement using lean six sigma principles that can help you through this transition. . If you have any questions about this information please contact your KatzAbosch representative; or contact us by clicking here. Article by: Claudia R. WolterClaudia Wolter, a Shareholder with KatzAbosch, joined the firm in 1988. She has played a major role in leading the firm into the 21st century with cutting edge initiatives, including the transition to and managing of a paperless environment. She serves as Co-Chair of the firm’s Accounting and Auditing Services Group, assists in the quality control management and oversight of the firm and is a member of the Construction and Real Estate Services Group. Most recently, Claudia served as a contributing author of “Construction Accounting,” an in-depth guide to construction financial and accounting issues for attorneys distributed by the American Bar Association. A dedicated professional, Claudia holds the prestigious distinction of Certified Construction Industry Financial Professional (CCIFP), a certification held by less than 50 professionals in Maryland and less than 1000 professionals in the United States, the designation of Certified Construction Auditor (CCA) from the National Association of Construction Auditors (NACA) and a Lean Six Sigma CPA Green Belt certification from Ohio State University ATI and Boomer Consulting, Inc.