Article
The ASC 606 transition for construction contractors: Special considerations
June 23, 2017 · Authored by Thomas J. Sheahan
After navigating the five elements of the revenue recognition process, there are other special considerations for a construction contractor to evaluate when reporting and disclosing revenue from contracts with customers.
Construction contractors should be aware of a number of other unique accounting and reporting items that may or may not differ from existing guidance under U.S. GAAP. Special consideration should be given to the accounting and reporting for contract assets and liabilities, contract costs, loss contracts, warranties, uninstalled materials, and mobilization.
Contract assets and liabilities
A contractor will present a contract in its statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the contractor’s performance and the customer’s performance at the reporting date.
A contract liability exists if the customer has paid consideration or if payment is due as of the reporting date but the contractor has not yet satisfied the performance obligation.
If the contractor has transferred goods or services as of the reporting date but the customer has not yet paid, the contractor would recognize either a contract asset or a receivable. An unconditional right to consideration is presented as a receivable. If a contractor’s right to consideration is conditioned on something other than the passage of time, the contractor would recognize a contract asset. The transfer from a contract asset to an account receivable balance (when the contractor has a right to payment) may not coincide with the timing of the invoice as is required under current guidance.
Costs in excess of billings and billings in excess of costs recognized on the balance sheet under current GAAP should be similar to the contract asset and contract liability recognized under the new standard.
Contract costs
In conjunction with ASC 606, the FASB amended ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers, to provide guidance on other assets and deferred costs related to contracts with customers. This updated standard provides guidance on accounting for costs a contractor incurs in obtaining and fulfilling a contract to provide goods and services to customers for both contracts obtained and contracts under negotiation.
