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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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