Best Practices for Applying ASC 606

In the construction industry, understanding revenue recognition is essential for accurate financial reporting and compliance. According to ASC 606, performance obligations are satisfied either over time or at a specific point in time. This distinction is crucial as it determines when revenue can be recognized, impacting financial statements and business decisions.

Why is Revenue Recognition Important

For many construction company owners, managing cash flow, profitability and compliance is a daily challenge. Accurate revenue recognition is at the heart of these issues. Missteps in recognizing revenue can lead to misstated financials, unexpected tax liabilities and potential legal complications. It’s not just about compliance; it’s about making informed business decisions that reflect the true progress and performance of your projects.

What are Revenue Recognition Methods

  • Revenue Recognized Over Time

Recognizing revenue over time is often the preferred method for long-term construction projects. This approach allows you to align revenue with the progress of your work, providing a more accurate reflection of your company’s performance. Here’s when this method applies:

  • Continuous Transfer of Control: The customer benefits as the project progresses.
  • Customer Control: The customer has control over the asset as it’s being constructed.
  • No Alternative Use: The asset under construction is specifically for the customer, and the contractor has a right to payment for work done to date.

Example: If you’re constructing a commercial building and meet the criteria for continuous transfer of control, recognizing revenue as you complete each phase of the project can offer a clearer financial picture.

  • Revenue Recognized at a Point in Time

In some cases, revenue should be recognized at a specific point in time, usually when control of the goods or services is fully transferred to the customer. This method is straightforward but requires careful consideration of the following indicators:

  • Legal Title Transfer: The ownership is transferred to the customer.
  • Physical Possession: The customer takes physical possession of the asset.
  • Significant Risks and Rewards: The customer assumes the risks and rewards of ownership.
  • Acceptance: The customer has formally accepted the asset.

Example: Delivering a prefabricated structure might mean recognizing revenue upon delivery and installation, as this is when the customer gains full control.

Making the Right Choice

Determining the correct method for construction revenue recognition involves more than just a superficial review. It requires an in-depth analysis of your contracts and the specifics of each project. Errors in this process can lead to significant financial repercussions, so it’s crucial to get it right.

Practical Steps for Construction Companies

  1. Analyze Contracts Thoroughly: Review all contract terms to determine the point at which control is transferred.
  2. Seek Professional Guidance: Engage with experts in construction accounting to navigate the complexities of ASC 606.
  3. Document Your Process: Keep detailed records of your decision-making process to support your financial reporting and audits.

Questions?

At Adams Brown, we specialize in helping construction companies like yours tackle the challenges of revenue recognition. Our team of seasoned professionals understands the intricacies of ASC 606 and is equipped to provide the guidance you need to ensure compliance and accuracy. Contact an Adams Brown construction revenue recognition advisor today.