Introduction
The construction industry often includes retainage provisions in its contracts. While the Financial Accounting Standards Board's Topic 606, "Revenue from Contracts with Customers," outlines how to present these contracts, it has not explicitly addressed retainage.
Recently, the FASB issued an educational paper to clarify GAAP presentation and disclosure requirements for retainage. While it does not modify GAAP, it does provide guidance regarding retainage accounting. Furthermore, the views expressed in their educational paper are those of the FASB staff and do not represent the official position of the FASB.
Presentation of Retention by Construction Contractors
When a company enters a contract with a customer, it must account for the remaining rights and obligations as either a contract asset or a contract liability. When either party has performed part of the contract, the company must present it on the balance sheet as either a contract asset or a liability based on its performance relative to payment. While a company can show both contract assets and liabilities on its balance sheet, it can not do so for the same contract.
Nothing prevents a private construction company from using other nomenclature for contract assets or liabilities. "Billings exceeding revenues" or "Revenue exceeding billings" would be an example of alternative nomenclature that would require sufficient explanation so as to distinguish these balance sheet accounts from accounts receivable and contract assets.
Disclosure of Retention by Construction Contractors
All private and public companies must disclose the opening and closing balances of receivables, contract assets, and contract liabilities from customer contracts if not otherwise presented or disclosed.
Regarding disclosure, the remaining provisions of Topic 606, Section 10-50-8, apply solely to public companies; however, since our readership is less likely to work with publicly held companies than private companies, Insightful Accountant has chosen not include those other provisions in this summary of the recent educational paper.
In addition to the disclosure mentioned above, another section of Topic 606 addresses the disclosure of retainage. Section 10-50-7 requires all entities (public or private) to disclose if receivables include amounts billed but not paid due to retainage; they must disclose how much money is owed, how much of that money will be paid after a year, and the years when the money will be paid under the retainage agreement.
For additional information, guidance, disclosure provisions, and examples, please see the official FASB educational paper.
Disclosure:
This article summarizes portions of the Financial Accounting Standards Board educational paper regarding "Topic 606: "Revenue from Contracts with Customers". This summary is for information and educational purposes only, it is not intended to serve as either legal or accounting advice.
Any trade names used herein that may be registered, trademarked, or otherwise held by their respective owners, are referenced for informational and educational purposes only.
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