Casual Man Presenting FASB 606

CliftonLarsonAllen (CLA) is a member of AGC’s Financial Issues Committee, a forum through which we advocate on financial reporting, tax, and legislative priorities.

Industry trends

AGC Financial Issues Committee Focuses on Revenue Recognition and Leases

  • Bradley Uherka
  • 2/28/2017

The Associated General Contractors (AGC) Financial Issues Committee recently met to discuss Financial Accounting Standards Board’s (FASB) projects that will have the most impact on the construction industry. Cullen Walsh, an assistant director from FASB, helped members understand some of the changes that will affect revenue recognition and leases.

FASB is also surveying stakeholders to assess how to focus its resources going forward. So far, no concrete projects have been identified that have similar magnitude as revenue recognition and leases. However, additional simplification projects seem likely.

Currently, FASB’s resources are still dedicated to revenue recognition and lease accounting, both of which will require attention from contractors in the coming years. What follows is the most current information available on these issues.

Revenue from contracts with customers

FASB Topic 606 provides the most current update on revenue recognition and is effective for fiscal years beginning after December 15, 2017, for public entities, and December 15, 2018, for non-public entities (calendar years 2018 and 2019, respectively). The most pertinent points for contractors are as follows:

  • Retrospective transition approaches will be allowed with cumulative catch‐up provisions.
  • Expanded disclosures will include disaggregation of revenue, revenue recognized from performance in prior periods, information related to contract balances and performance obligations, significant judgements impacting methods used, and allocation of performance obligations.
  • Public companies will present additional disclosures beyond the private requirements. However, private companies are also encouraged to work through the requirements prior to implementation to fully understand their future obligations.

Leases

FASB’s update on leases is effective for fiscal years beginning after December 15, 2018, for public entities, and December 15, 2019, for non-public entities (calendar years 2019 and 2020, respectively). Construction companies will be most interested in the following points concerning leases:

  • The income statement will have minimal impact, and the balance sheet will be grossed up with right-of-use assets and liabilities.
  • The entire asset will be recorded outside of current assets, but the liability will split current and long-term portions, this will impact key ratios used to evaluate contractors.
  • Calculations will use the incremental borrowing rate or the risk-free rate of return if the simplified alternative is used.
  • Renewal options will be included if the company is economically compelled to renew.

Industry issues for the future

The committee discussed other financial reporting issues, as well as several topics that may arise in the future.

  • Tracking performance obligations and additional right-of-use assets will place new demands on software packages, which will affect companies.
  • Further guidance on uninstalled materials is coming in the summer of 2017. Companies will need to determine their accounting policy on how and when the profit on uninstalled materials will be recognized.
  • There were initial concerns over reducing contract amounts subject to liquidated damages, but when there is minimal history of actually paying them, it appears that the overriding principle in Topic 606 is simply that revenue recognition should make logical sense.
  • Heavy equipment rental agreements frequently include provisions such as servicing the equipment, transporting it, and even providing an operator. These additional clauses all pose challenges when implementing the new lease standard because it is difficult to determine what costs need to be reflected as a right-of-use asset and liability.

Many contractors will find that implementing Topic 606 does not significantly impact their bottom lines or balance sheets. However, there are additional disclosures, and companies should not assume that nothing will change in the future.

How we can help

CLA is a member of AGC and a regular attendee at the Financial Issues Committee meetings. We work to communicate our clients’ needs, and we encourage our clients to be involved with the AGC’s numerous programs nationwide. Actively engaging with the AGC and similar industry associations allows you to connect with our community and speak on behalf of the industry to legislative and regulatory bodies. By participating, we also get insights directly from groups such as FASB, which help us provide clients with high quality insights on key issues like revenue recognition and leases.