Rethinking revenue recognition – the case of construction contracts under International Financial Reporting Standards

Accounting scandals and deficiencies in standards have persuaded international accounting standard-setters to rethink revenue recognition. The proposals of the joint IASB/FASB-project Revenue Recognition feature an asset-liability approach relying on measurement at fair values or at allocated customer consideration amounts. This paper chooses construction contracts to illustrate and to evaluate the far reaching changes implied by the proposals in a multi period context. Main results suggest that the proposals are ambivalent in terms of relevance but critical in terms of reliability compared to the recent IAS 11. A pure fair value approach which yields irritating patterns of revenue recognition, is inappropriate for stewardship purposes, and unlikely to be adopted because of regulatory incompatibilities. Measuring performance obligations at allocated consideration amounts partly mitigates these concerns.