The Financial Accounting Standards Board (FASB) released its long-awaited standard “Revenue from Contracts with Customers” (Accounting Standards Codification Section 606, or ASC 606) in May 2014. One of the FASB’s objectives with this guidance was to create a single revenue recognition standard that would be required for all businesses, as opposed to the myriad of industry-specific standards currently in place. 

In a few years, with this shift from a tailored approach to a one-size-fits-all approach, there are naturally going to be some winners and losers. Some industries will largely retain the guidance to which they are accustomed, and others will have to adapt to new rules. 

Where does the construction industry fall in this spectrum? With a good accounting question comes a good accounting answer: it depends. 

The guidance now codified in ASC 606 has been deliberated for a long time, and it has changed significantly from the initial drafts. In the end, the construction industry has been a benefactor of the standard-setting process. 

Early drafts suggested that the percentage-of-completion method of revenue recognition, which is basically the cornerstone of accounting and financial analysis for the construction industry, would not survive. If ever an accounting methodology was more universally understood by both preparers and users of financial statements, as well as regulators, it was the percentage-of-completion method of revenue recognition. Thankfully, the outcry from the industry was heard, and this method is now alive and well in the new standard. 

Because this guidance is far reaching and expected to have a significant impact, the FASB delayed the implementation until 2018 for public companies and 2019 for private companies. This extended runway is a gift and will be absolutely necessary for the industries that will be forced to get to know a new set of rules. 

How ASC 606 Affects the Construction Industry 
While the early drafts created disparity from existing guidance and a lot of undue consternation for the construction industry, the final version is, on the surface, very similar to the existing guidance. Unfortunately, this similarity is creating a dangerous sense of calm and indifference for the industry. 

For many contractors, ASC 606 will have a minimal impact. But for some, it will create an acceleration of revenue recognition, and for others it will cause a deferral of revenue recognition. Contractors must take time now to figure out which group they belong to, as well as the potential business impact. 

  • Read the guidance. This seems like an obvious statement, but it’s essential to have a working knowledge of ASC 606. Accountants can typically understand the nuances of new guidance by attending continuing education courses and reserve the actual technical literature as a backstop, as needed. Construction executives do not have that opportunity. 
  • Assemble a team. Rarely does an accountant need to include non-accounting personnel in the implementation of new technical guidance. But applying ASC 606 could create action items for an array of construction departments, including accounting, financial analysis, legal, IT, internal audit and the executive team, among others. The implementation needs to be a team effort involving each of the key functions that will be impacted. Form a steering committee to attack this new guidance. 
  • Review common contracts. In light of the new guidance, review the common contract templates used in the business, as well as typical behavior related to change orders, claims, incentives, pre-contract costs, uninstalled equipment and whether contracts constitute a series of projects. Determine if and how the guidance will change the accounting for each of these typical contract features. 
  • Develop a communication strategy. Once the analysis has been completed, determine the best way to communicate the results to key stakeholders. If the analysis reveals a significant impact, the company will benefit from an early communication so that expectations can be properly set for surety bond providers, banks and shareholders using financial statements. Even if the team concludes the guidance will have a minimal impact, the “no expected changes” message will still be a key communication to those stakeholders as the implementation date draws nearer. 
  • Update systems. As a result of changes identified in this process, the company needs to consider if additional internal controls or technologies are necessary. Do internal controls need to be designed and implemented to identify and account for new triggering events? What changes need to be considered regarding how transactions make their way through the company’s workflows? In addition, are the changes significant enough that a software solution will be necessary to resolve them? The selection of a new vendor and implementation of a software package can be a time-consuming and expensive endeavor. This is another reason the FASB has provided a longer period for compliance. 
Next Steps 
The FASB is assembling Transition Resource Groups (TRGs) to serve as sounding boards for industry participants to raise questions on how certain provisions in the guidance apply to specific circumstances common for that industry. The TRGs will analyze those questions and provide supplemental guidance to help businesses in the implementation process. The construction TRG already has several significant issues on its agenda. Going forward, the construction TRG will be a critical resource for any company’s steering committee. 

Taking a proactive approach to ASC 606 implementation and taking advantage of the gift of time will be critical. Those that don’t likely will experience varying degrees of turbulence. 


Pete Miller is a shareholder focusing on construction at Clark Nuber PS, Bellevue, Wash. For more information, call (425) 454-4919 or email pmiller@clarknuber.com