Key Changes to Construction Contractors’ Financial Statements Due to New Revenue Recognition Accounting Standard
It’s hard to believe we are three months into the new year and as year-end accounting procedures are wrapping up, CPA issued financial statements are rolling out. You will notice that these financial statements have a different look from past years courtesy of the new revenue recognition accounting standard (ASU 606) effective for all non-public companies’ December 31, 2019 financial statements.
Here are some of the key changes to take note of in the financial statements issued for construction contractors:
The balance sheet will contain new captions as the term “Contract Assets” and “Contract Liabilities” were introduced with ASU 606. They will include the following:
- Revenues recognized in excess of amounts billed for fixed price contracts which was previously captioned under “Costs and estimated earnings in excess of billings on uncompleted contracts.”
- Retainage receivables that represent contractual retention amounts withheld on the condition of satisfactory performance. These amounts were previously included with accounts receivable.
- Capitalized costs that represent significant contract fulfillment costs and costs to obtain a contract.
- Billings in excess of revenues recognized for fixed price contracts which were previously captioned under “Billings in excess of costs and estimated earnings on uncompleted contracts.”
- Accrued losses on uncompleted contracts
The statement of retained earnings or changes in equity will include the effect, if any, of the implementation of the new standard under either allowable method of transition, the full retrospective basis or the modified retrospective basis.
The footnotes to the financial statements will include several modifications from past years. The significant accounting policies to note are the revenue recognition policy, contracts assets, contract liabilities and the new pronouncement implementation. The new standard also requires several new disclosure requirements. They include but are not limited to the following:
- Disclosure of the Company’s revenue from contracts with customers to the extent it allows users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from the contracts with customers.
- Disaggregation of revenue into categories that reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.
- Information about the performance obligations in contracts with customers including when/how they are satisfied, significant payment terms, the nature of goods or services and any warranty or other obligations related to them.
- Significant estimates, judgements, and changes in judgements, made in applying the guidance to contracts with customers.
- The beginning and ending balances of the receivables, contract assets and contract liabilities of contracts with customers.
- The transition method utilized and the impact on the financial statements.
If you have questions about the new look of the financial statements, Sax’s Construction Practice would be happy to help. Lean on our industry expertise and contact a Sax advisor at (973) 472-6250.