Construction Contract Accounting Standard: A Guide for Contractors
As a contractor, understanding the complexities of accounting for construction contracts can be daunting. However, with the release of the new construction contract accounting standard, ASC 606, contractors now have a more definitive set of guidelines to follow.
The new standard, which went into effect for public companies in 2018 and for private companies in 2019, aims to clarify when and how revenue should be recognized for construction contracts. Here are some key points to keep in mind:
1. Determine the scope of the contract
The first step in accounting for construction contracts is to determine the scope of the contract. This includes identifying the parties involved, the goods or services to be provided, and the terms and conditions of the arrangement. Additionally, it is important to identify any variable consideration, such as bonuses or penalties, that may affect the amount of revenue recognized.
2. Identify performance obligations
Once the scope of the contract has been established, the next step is to identify the performance obligations. Performance obligations refer to the distinct promises made by the contractor to the customer, such as the delivery of specific goods or completion of certain services.
3. Allocate transaction price
After identifying performance obligations, the transaction price must be allocated to each obligation based on its relative standalone price. This allocation requires estimation and may be subject to change throughout the life of the contract.
4. Recognize revenue
Revenue should be recognized when control of the promised goods or services is transferred to the customer. This may occur over time, such as with a long-term construction project, or at a point in time, such as with the delivery of a completed product.
5. Record contract costs
Finally, contractors must consider any costs associated with fulfilling their contractual obligations, such as labor, materials, and overhead. These costs should be recorded as expenses as they are incurred and may be subject to adjustment based on changes in estimates throughout the life of the contract.
Overall, the new construction contract accounting standard provides more precise guidelines for contractors to follow when accounting for revenue and costs associated with construction contracts. By properly applying these guidelines, contractors can ensure that their financial statements accurately reflect their performance and provide valuable information to stakeholders.