As seen in the PICPA Journal – Winter 2019
By: Robert Williams, CPA
Beginning in 2018, public engineering and construction companies must comply with extensive revenue-related disclosures required under ASC 606, Revenue from Contracts with Customers. Beginning in 2019 (years beginning after Dec. 15, 2018), nonpublic engineering and construction companies issuing GAAP-basis financial statements must also comply with expanded revenue-related disclosures. While the Financial Accounting Standards Board has provided all nonpublic companies with practical expedients that significantly reduce the quantity and detail of these new disclosures, the revenue-related disclosures for nonpublic companies will still present challenges. Engineering and construction companies will need to closely evaluate and clearly articulate how, why, and when they may recognize revenue from contracts with customers, and their accountants will need to evaluate the appropriateness of the applicable disclosures.
ASC 606 requires companies to identify each individual “performance obligation” inherent within their contracts; allocate the transaction price to the identified performance obligations; and recognize contract revenue only to the extent that specific performance obligations are satisfied, and control of the product or service has transferred.
While many companies anticipate that they will recognize revenue from each of several performance obligations at a point in time, engineering and construction contractors expect the bulk of their contracts will consist of a single-performance obligation that is recognized over time (the length of the contract). But contractors may find that those contracts that include recurring customer services actually have multiple performance obligations with revenues that should be recognized at various points in time.
Engineering and construction contractors should prepare to include all of the following disclosures in their financial statements.
- Public companies must make extensive multilayered “disaggregation of revenue” disclosures. However, nonpublic companies may elect only to disclose revenue recognized during the reporting period disaggregated based on when control of goods or services transfers to the customer (a point in time or over time).
- For performance obligations satisfied over time, include the input or out-put method used to recognize revenue. Nonpublic disclosures should include when the entity typically satisfies its performance obligations, the significant terms in the contract, the nature of goods and services in the contract, obligations, judgments made or changed in applying ASC 606, and all significant methodologies. Any credit losses should be disclosed in accordance with Topic 326-20, along with any financing component.
- Which of the two transition methods of adopting ASC 606 they applied (full or modified retrospective method).
Disclosure should include the costs to obtain or fulfill a contract, including the account balances and amortization methods. These would include applicable setup and mobilization costs incurred at a contract’s inception to enable the contractor to fulfill its obligations. The disclosure should include judgments by management about whether the costs are costs to fulfill a contract and qualify for capitalization as an asset.
More challenging, nonpublic entities should provide a qualitative discussion about the factors that affect the nature, amount, timing, and uncertainty of companies’ revenue recognition and cash flows. Such disclosures would include the following:
- The nature of the promised goods or services found in its contracts, including any rights of return or refund, or other similar customer rights
- When the performance obligations are typically considered satisfied and control of the product is considered transferred to the customer
- The significant payment terms of its contracts (among other disclosure items), including when payments are typically due from customers and whether the business enters into contracts with variable consideration, and, if so, the amount of variable consideration included in the transaction price that is constrained
- Any warranties and related obligations to customers, including a description of the types of warranties and related obligations
- The beginning and ending balances of contract assets and contract liabilities, including changes in those balances
The complexity of the disclosures discussed above will vary based on the nature of the contracts. Financial statement preparers need to be ready for the challenge of expanded revenue-related disclosures. The disclosures discussed above represent many, but not all, of the revenue-related disclosures required for engineering and construction contractors. Review ASC 606-10-50, 340-40-50, and other applicable standards for additional disclosure requirements.