Accounting Standards Codification (ASC) 606 became effective for public companies beginning January 1, 2018. As a result, we are seeing our first real world examples of quarterly reporting from construction contractors.
While ASC 606 is not effective for private companies until January 1, 2019, these public company examples will help shape the financial statements and disclosures for private companies. Our most significant early observation is the extensive disclosures specifically related to ASC 606, including:
- Detailed introductions to ASC 606, including a definition of the 5 step revenue recognition model.
- Impact on individual segments (i.e. materials versus large projects).
- Impact on existing projects in process at the time of adoption.
- Discussion of typical performance obligations in each major segment.
- Accounting for both fixed and variable amounts (i.e. incentives, awards, and penalties).
- Contract modifications, including unapproved change orders.
- Discussion of cost to complete calculations.
- Impact on pre-contract and mobilization costs.
Construction Company Insights
While many of these disclosures existed prior to ASC 606, it was the volume of disclosure and language that stood out as we read the financial statements. Our recommendation to private companies is to begin drafting your financial statements now. While most of the disclosure information should be accessible and familiar, there may be information that requires additional effort from your team and new reporting from your accounting system. Understanding what you need to disclose before the year begins will allow you to adapt your processes in advance.
Another early observation is that the general impact of adjusting the jobs in progress upon adoption does not appear to be significant. This is not to suggest there are no adjustments. There are adjustments, however, in comparing the actual impacts we are seeing the most impact to disclosures.
As more examples become available, we will continue to update our readers. If you are beginning to evaluate the impact of ASC 606 on your company or you have already started the process and have questions, please reach out to us. We have a team of professionals that are ready to help.