Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, Topic 606, commonly referred to as ASC 606, became effective for private companies for fiscal years beginning on, or after, December 15, 2018. Most financial professionals are familiar with the “five-step model” commonly used to implement ASC 606, but hidden within each of those five seemingly straight-forward steps are nuances and intricacies that may require construction companies to invest in additional administrative and accounting resources to implement the accounting standard.
Even if the standard is not expected to change the company’s current revenue recognition practices, documenting the consideration, evaluation, and conclusion about the impact, or lack thereof, of the items detailed below is important for effective implementation of ASC 606.
Step 1: Identify the contract.
Contractors are very familiar with this step; they’ve been executing contracts for decades. It would be superfluous to discuss the importance and significance of reading contracts; however, contracts should be read in detail. The details buried deep in the pages of a contract could impact the next four steps and the documentation of your company’s ASC 606 implementation. A few examples of clauses within contracts that may impact revenue recognition practices under the new standard include warranty provisions, termination for convenience, liquidated damages, progress payments, scope of work, contract sum, milestones and substantial completion dates. To address this step and begin the documentation process, contractors could evaluate their revenue with a systematic and rational approach, such as by revenue streams, types of contracts, specific customers, and/ or individually significant or unusual contracts.
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