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Revenue Accounting for Contracts and Adoption of ASC Topic 606 | 9 Months Ended
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Jun. 28, 2019
Revenue from Contract with Customer [Abstract] |
Revenue Accounting for Contracts and Adoption of ASC Top 606 | Revenue Accounting for Contracts and Adoption of ASC Topic 606 On September 29, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, including the subsequent ASUs that amended and clarified the related guidance. The Company adopted ASC Topic 606 using the modified retrospective method, and accordingly the new guidance was applied retrospectively to contracts that were not completed or substantially completed as of September 29, 2018 (the date of initial application). As a result, the Company recorded a cumulative effect adjustment of $37.2 million which is net of $10.3 million of tax. The entry decreased retained earnings related to continuing operations by $21.2 million (net of tax) and retained earnings related to discontinued operations by $16.0 million (net of tax) as of September 29, 2018. Additionally, the following cumulative effect adjustments were recorded: Continuing operations
• | An increase to Deferred Income Tax Assets included within miscellaneous assets of $5.4 million;
• | An increase to Contract liabilities of $15.2 million;
• | A decrease to Receivables of $11.4 million;
Discontinued operations
• | An increase to Current liabilities held for sale of $0.6 million;
• | A decrease to Current assets held for sale of $15.4 million;
The decrease in retained earnings primarily resulted from a change in the manner in which the Company determines the performance obligations for its projects. Prior to the adoption of ASC 606, the Company typically segmented contracts that contained multiple services by service type - for instance, engineering, procurement and construction services - for purposes of revenue and margin recognition. Under ASC 606, multiple-service contracts where the Company is responsible for providing a single deliverable (e.g. a constructed asset) will be treated as a single performance obligation for purposes of revenue recognition and thus no longer will be segmented if the individual service types are not identified as distinct performance obligations under the contract. Typically, this will occur when the Company is contracted to perform both engineering and construction on a project. The following table presents how the adoption of ASC Topic 606 affected certain line items in the Consolidated Statements of Earnings:
| Three Months Ended |  | Nine Months Ended
| June 28, 2019 |  | June 28, 2019
(in thousands) | Recognition Under Previous Guidance |  | Impact of the Adoption of ASC Topic 606 |  | Recognition Under ASC Topic 606 |  | Recognition Under Previous Guidance |  | Impact of the Adoption of ASC Topic 606 |  | Recognition Under ASC Topic 606
Revenues | $ | 3,166,867 |  |  | $ | 2,755 |  |  | $ | 3,169,622 |  |  | $ | 9,328,219 |  |  | $ | 16,786 |  |  | $ | 9,345,005 |
Direct costs of contracts | (2,543,488 | ) |  | — |  |  | (2,543,488 | ) |  | (7,533,511 | ) |  | — |  |  | (7,533,511 | )
Gross profit | 623,379 |  |  | 2,755 |  |  | 626,134 |  |  | 1,794,708 |  |  | 16,786 |  |  | 1,811,494 |
Operating Profit | 87,199 |  |  | 2,755 |  |  | 89,954 |  |  | 288,977 |  |  | 16,786 |  |  | 305,763 |
Earnings from Continuing Operations Before Taxes | 90,644 |  |  | 2,755 |  |  | 93,399 |  |  | 280,633 |  |  | 16,786 |  |  | 297,419 |
Income tax expense for Continuing Operations | 2,831 |  |  | (850 | ) |  | 1,981 |  |  | (9,508 | ) |  | (3,321 | ) |  | (12,829 | )
Net Earnings of the Group from Continuing Operations | 93,475 |  |  | 1,905 |  |  | 95,380 |  |  | 271,125 |  |  | 13,465 |  |  | 284,590 |
Net Earnings of the Group from Discontinued Operations | 434,442 |  |  | 1,242 |  |  | 435,684 |  |  | 434,087 |  |  | 4,750 |  |  | 438,837 |
Net Earnings of the Group | 527,917 |  |  | 3,147 |  |  | 531,064 |  |  | 705,212 |  |  | 18,215 |  |  | 723,427 |
Net Earnings Attributable to Jacobs from Continuing Operations | 87,460 |  |  | 1,905 |  |  | 89,365 |  |  | 255,547 |  |  | 13,465 |  |  | 269,012 |
Net Earnings Attributable to Jacobs from Discontinued Operations | 433,835 |  |  | 1,242 |  |  | 435,077 |  |  | 431,892 |  |  | 4,750 |  |  | 436,642 |
Net Earnings Attributable to Jacobs | $ | 521,295 |  |  | $ | 3,147 |  |  | $ | 524,442 |  |  | $ | 687,439 |  |  | $ | 18,215 |  |  | $ | 705,654 |
The following table presents how the adoption of ASC Topic 606 affected certain line items in the Consolidated Balance Sheets:
| June 28, 2019
(in thousands) | Recognition Under Previous Guidance |  | Impact of the Adoption of ASC Topic 606 |  | Recognition Under ASC Topic 606
Receivables and contract assets (previously presented as Receivables) | $ | 2,775,479 |  |  | $ | 3,710 |  |  | $ | 2,779,189 |
Current assets held for sale | $ | 4,920 |  |  | $ | (2,216 | ) |  | $ | 2,704 |
Miscellaneous noncurrent assets | $ | 771,423 |  |  | $ | (3,321 | ) |  | $ | 768,102 |
Contract Liabilities (previously presented as Billings in excess of costs) | $ | 519,561 |  |  | $ | (13,167 | ) |  | $ | 506,394 |
Current liabilities held for sale | $ | 5,470 |  |  | $ | (3,367 | ) |  | $ | 2,103 |
Update to Major Accounting Policies Upon adoption of ASC Topic 606, the Company revised its accounting policy on revenue recognition from the policy provided in the Notes to Consolidated Financial Statements included in the Form 10-K for the year ended September 28, 2018. The revised accounting policy on revenue recognition is provided below for revenue recognized following the adoption of ASC Topic 606. For periods presented prior to September 29, 2018, our revenue recognition policies are summarized in the 2018 Form 10-K. Engineering, Procurement & Construction Contracts and Service Contracts The Company recognizes engineering, procurement, and construction contract revenue over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. Upon adoption of ASC Topic 606, contracts which include engineering, procurement and construction services are generally accounted for as a single deliverable (a single performance obligation) and are no longer segmented between types of services. In some instances, the Company’s services associated with a construction activity are limited only to specific tasks such as customer support, consulting or supervisory services. In these instances, the services are typically identified as separate performance obligations. The Company recognizes revenue using the percentage-of-completion method, based primarily on contract costs incurred to date compared to total estimated contract costs. The percentage-of-completion method (an input method) is the most representative depiction of the Company’s performance because it directly measures the value of the services transferred to the customer. Subcontractor materials, labor and equipment and, in certain cases, customer-furnished materials and labor and equipment are included in revenue and cost of revenue when management believes that the company is acting as a principal rather than as an agent (e.g., the company integrates the materials, labor and equipment into the deliverables promised to the customer or is otherwise primarily responsible for fulfillment and acceptability of the materials, labor and/or equipment). The Company recognizes revenue, but not profit, on certain uninstalled materials that are not specifically produced, fabricated, or constructed for a project. Revenue on these uninstalled materials is recognized when control is transferred. Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client. Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Under the typical payment terms of our engineering, procurement and construction contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly) and customer payments on are typically due within 30 to 60 days of billing, depending on the contract. For service contracts, the Company recognizes revenue over time using the cost-to-cost percentage-of-completion method. Service contracts that include multiple performance obligations are segmented between types of services. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on service contracts that have not been billed to clients is classified as unbilled receivables and other and contract assets, both included within Receivables and contract assets on the Consolidated Balance Sheets. Amounts billed to clients in excess of revenue recognized on service contracts to date are classified as a current liability under contract liabilities. In some instances where the Company is standing ready to provide services, the Company recognizes revenue ratably over the service period. Under the typical payment terms of our service contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, and customer payments are typically due within 30 to 60 days of billing, depending on the contract. Direct costs of contracts include all costs incurred in connection with and directly for the benefit of client contracts, including depreciation and amortization relating to assets used in providing the services required by the related projects. The level of direct costs of contracts may fluctuate between reporting periods due to a variety of factors, including the amount of pass-through costs we incur during a period. On those projects where we are acting as principal for subcontract labor or third-party materials and equipment, we reflect the amounts of such items in both revenues and costs (and we refer to such costs as “pass-through costs”). Variable Consideration The nature of the Company’s contracts gives rise to several types of variable consideration, including claims and unpriced change orders; awards and incentive fees; and liquidated damages and penalties. The Company recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company estimates the amount of revenue to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the amount. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in the company’s performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. If the requirements for recognizing revenue for claims or unapproved change orders are met, revenue is recorded only when the costs associated with the claims or unapproved change orders have been incurred and only up to the amount of cost incurred. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for claims accounting have been satisfied. The Company generally provides limited warranties for work performed under its engineering and construction contracts. The warranty periods typically extend for a limited duration following substantial completion of the Company’s work on the project. Historically, warranty claims have not resulted in material costs incurred for which the Company was not compensated for by the customer. Practical Expedient If the Company has a right to consideration from a customer in an amount that corresponds directly with the value of the Company’s performance completed to date (a service contract in which the company bills a fixed amount for each hour of service provided), the Company recognizes revenue in the amount to which it has a right to invoice for services performed. The Company does not adjust the contract price for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a service to a customer and when the customer pays for that service will be one year or less. Disaggregation of Revenues Our revenues are principally derived from contracts to provide a diverse range of technical, professional, and construction services to a large number of industrial, commercial, and governmental clients. We provide a broad range of engineering, design, and architectural services; construction and construction management services; operations and maintenance services; and process, scientific, and systems consulting services. We provide our services through offices and subsidiaries located primarily in North America, South America, Europe, the Middle East, India, Australia, Africa, and Asia. We provide our services under cost-reimbursable and fixed-price contracts. Our contracts are with many different customers in numerous industries. Refer to Note 8- Segment Information for additional information on how we disaggregate our revenues by reportable segment. The following table further disaggregates our revenue by geographic area for the three and nine months ended June 28, 2019 and June 29, 2018 (in thousands):
| Three Months Ended |  | Nine Months Ended
| June 28, 2019 |  | June 29, 2018 |  | June 28, 2019 |  | June 29, 2018
Revenues: |  |  |  |  |  |  |
United States | $ | 2,357,836 |  |  | $ | 2,047,974 |  |  | $ | 6,701,474 |  |  | $ | 5,086,405 |
Europe | 491,036 |  |  | 561,689 |  |  | 1,706,163 |  |  | 1,649,181 |
Canada | 59,830 |  |  | 56,104 |  |  | 160,339 |  |  | 115,659 |
Asia | 33,918 |  |  | 45,241 |  |  | 113,294 |  |  | 119,699 |
India | 12,129 |  |  | 13,629 |  |  | 43,131 |  |  | 38,987 |
Australia and New Zealand | 136,711 |  |  | 146,536 |  |  | 386,594 |  |  | 437,244 |
South America and Mexico | 1,225 |  |  | 5,964 |  |  | 7,244 |  |  | 12,924 |
Middle East and Africa | 76,937 |  |  | 56,486 |  |  | 226,766 |  |  | 127,817 |
Total | $ | 3,169,622 |  |  | $ | 2,933,623 |  |  | $ | 9,345,005 |  |  | $ | 7,587,916 |
Contract Liabilities Contract liabilities represent amounts billed to clients in excess of revenue recognized to date. Amounts classified as “Billings in excess of costs” on the Consolidated Balance Sheets of our 2018 Form 10-K have been renamed to “Contract liabilities” on the Consolidated Balance Sheets. The increase in contract liabilities was a result of normal business activity and not materially impacted by any other factors. Revenue recognized for the three and nine months ended June 28, 2019 that was included in the contract liability balance on September 28, 2018 was $33 million and $331 million. Remaining Performance Obligations The Company’s remaining performance obligations as of June 28, 2019 represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The Company had approximately $11.58 billion in remaining performance obligations as of June 28, 2019. The Company expects to recognize 53% of our remaining performance obligations within the next twelve months and the remaining 47% thereafter. Although remaining performance obligations reflect business that is considered to be firm, cancellations, scope adjustments, foreign currency exchange fluctuations or deferrals may occur that impact their volume or the expected timing of their recognition. Remaining performance obligations are adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate.

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- Definition The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -URI http://asc.fasb.org/topic&trid=49130388 + Details
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