Developer fee recognition under new revenue recognition standards for 2019

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  • #2758
    Scott Seamands

    Hello All! The new revenue recognition standards are effective January 1, 2019 for calendar year affordable housing entities and our firm has received a lot of inquiries about how to apply the new 5-step revenue recognition model to the typical development services agreement (DSA). In advance of my presentation on this issue at the Dallas CFO meeting this month, I thought I’d share how we’ve been applying the new model:

    The main issue is identifying the performance obligations in the agreement. Construction contractors probably view their contract as having only one performance obligation, in the absence of continuing warranties, so I think developers can use this logic to conclude that the DSA’s performance obligation is to complete all of the services listed in the agreement. Although there are cash payment milestones in the contract, those wouldn’t need to be seen as individual performance obligations. The definition of a performance obligation would involve services that are often performed under separate agreements and have value on a stand-alone basis. So I think developers can conclude that the various milestone events would not typically be performed under separate agreements and it would be very inconvenient to switch to another developer mid-way through a DSA.  So, if the DSA is a single performance obligation, then revenue can be recognized over time (probably using the same methodology that developers were using in the past).

    I’m curious to see if anyone else has a different interpretation of the new standards. As I mentioned above, this will be a topic at the Dallas meeting later this month.


    Scott Seamands, CPA

    Lindquist, von Husen & Joyce LLP

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    • #3452
      AvatarKenny Dennison

      I was an attendee in Dallas and I am curious of the pulse of the community as more time as elapsed specifically surrounding the concept of a development service agreement (DSA) as one performance obligation.   I do see that argument, but I also think it could be argued there are at least two performance obligations – 1 for the work performed before construction commences and 1 for the oversight of construction.

      The guidance states a good or service that is promised to a customer is distinct if both of the following criteria are met:  1) The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct). 2) The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

      I think the services in a DSA up and until the investor is in the LP and construction commences would meet the above criteria and thus be a separate performance obligation.

      I appreciate any feedback on this approach.

      Kenny Dennison, CPA

      Dauby O’Connor & Zaleski, LLC


    • #3280
      AvatarPaul Sussman

      Wondering how different organizations budget in their annual budgets given the sometimes very significant variance btwn cash and accrual.  I’ve seen some who budget (and report w/ variance analysis) accrual, then track cash receipts on the side; others who budget for cash receipts and track accrual on the side (and of course for the audit TB P&L).

    • #3237
      AvatarFrances Ferguson

      Thank you Scott!, francie


    • #3234
      AvatarScott Seamands

      As an update to my question above, yesterday’s group discussion at the Dallas convening indicated that viewing the DSA as a single performance obligation was generally accepted as a way of simplifying the revenue recognition implementation. Then it’s just a matter of how to recognize the entire fee over time, using a percentage of completion model. The payment milestones are not necessarily a useful guideline to follow when it comes to percentage of completion calculations. The topic paper (4a) on the SM website is being updated to reflect the new revenue recognition standards.

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