The ASC 606 transition for construction contractors: Recognizing revenue

In this series, we have identified the contract, identified the performance obligations, determined the transaction price and allocated the transaction price to the various performance obligations. The final step is to recognize revenue as performance obligations are satisfied, by transferring a promised good or service to a customer. This occurs as the customer obtains control of the asset. ASC 606 requires additional consideration and documentation related to the transfer of control, including whether the transfer of control occurs over time or at a point in time.

A construction contractor has satisfied a performance obligation by transferring the promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. Control of a good or service is demonstrated when a customer has the ability to direct its use and obtain substantially all of the remaining benefits associated with the use of the good or service. Control also means the ability to prevent other entities from directing the use of, and receiving benefit from, a good or service. A contractor must make a determination as to when it believes its customer obtains control. Some possible indicators of control passing to the customer include:

• Using the asset to produce goods or services
• Using the asset to enhance the value of other assets
• Using the asset to settle liabilities or reduce expenses
• Selling or exchanging the asset
• Pledging the asset to secure a loan
• Holding the asset

Control passes to a customer in one of two ways: either at a point in time or over time.

Transfer of control over time

The new standard requires a contractor to determine, at contract inception, whether it will transfer control of a promised good or service over time or at a point in time—regardless of the length of contract or other factors. Depending on the measure of progress a contractor applies, the accounting for a contract that meets the criteria for recognition of revenue over time may be similar to the method a contractor currently applies under existing guidance (i.e., percentage-of-completion). It is presumed that control transfers at a point in time if a contractor is unable to demonstrate that control transfers over time.

The new accounting standard provides that revenue is recognized over time if any of the following criteria are met: