Revenue Recognition: Treatment of Significant Financing as Part of Transaction Price
Determining the transaction price is an essential part of ASC 606. One aspect of the transaction price that must be considered is significant financing. In general, significant financing exists when
- The contractor and the customer either explicitly or implicitly agree to a timing of payment arrangement that benefits one of the parties and
- Payments extend for more than one year of when the good or service is transferred to the customer.
Note that typical retainage terms do not constitute financing. In addition, because the transaction value assigned to the contract excludes the financing on the job schedule, separate lines should be created on the WIP schedule.
To help you stay in compliance with revenue recognition standards, save this Construction Issue Sheet.