...critics say getting management and other staff to adopt the new performance obligation method is unlikely. As a result, a company could be forced to keep multiple sets of books.

“Percentage of completion is logical,” says Steve Lords, chief financial officer of contractor Martin Harris, Las Vegas, and a member of the FASB Private Company Reporting Committee. “It makes sense to contractors.”

If the change were adopted, Lords says, “our company would continue to keep books during the year on percent- complete accounting, then have to pay some horrendous fee of something like $50,000 to have it converted at the end of the year.” Further, companies could incur added administrative costs, such as hiring additional accounting staff. Lords says new software would be needed, too. “If you make this kind of change, the software out there wouldn’t be able to do it,” he adds.

Pressures After Scandal

The draft standard is the latest step by FASB to overhaul financial reporting standards. In the wake of financial scandals involving companies such as Enron and Tyco, some observers say the Security and Exchange Commission has pressured FASB to “keep a clean house, or we’ll clean it for you.”

In defense of FASB’s proposed changes, Cadambi notes that providing a model that is reflected across multiple industries would be particularly helpful for investors. “An investor in multiple companies would want a consistent [reporting] model across all industries,” he says. “If someone is following a technology stock or a product stock or a construction stock, everyone would know that the same standard is being followed.”

Under the proposed changes, each performance obligation would be treated as an economic unit of measure, meaning some obligations on the same project could carry losses while others might show a profit. There would be other big changes. For example, some performance obligations might not qualify for percentage-of-completion accounting. Today, percentage-of-completion accounting applies to the entire contract.

One of the most interesting—or scary—aspects of the proposed rule is that change orders might be considered new performance obligations.

In a highly fragmented industry that predominantly comprises small businesses, the benefit would be limited, says Lords. “There are very few public companies in this industry,” he says. “This is a big change for an industry [in which] the vast majority of companies are private.”