My company custom designs and manufactures certain components for airplanes. Usually the customer provides their specifications, and we design it based on their specifications. Once the design is done and they approve, we invoice them and then proceed to the manufacturing. When the components are built, we then invoice the customer once we ship them. Under 606, would our revenue recognition be different?
Design and build contracts
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There could potentially be a change in revenue recognition under 606. First you need to determine the performance obligations. Usually design and build contracts for engineering and construction companies are considered one performance obligation due to the interdependence of the components on the design. However, you would need to do an analysis to see if the design is a distinct performance obligation. Some factors that would suggest that it is a distinct performance obligation is if the company has a right to payment once the design is completed, if the company could sell the design separately from the components, and if the customer has the title to the design.
Once you determine the performance obligations, you would recognize revenue for each over time if it meets the 3 criteria in 606 or if not, at a point in time. If you have one performance obligation that is recognized over time, most engineering and construction companies use the cost to cost method (percentage of completion) to recognize revenue. If you have two separate performance obligations (one for design and one for build), you would recognize revenue when control of these is transferred to the customer.