The construction industry presents its own unique set of challenges when it comes to accurate and timely financial reporting. Revenue in construction is derived from custom building contracts with specific terms, specifications, and deliverables, which adds complexity to revenue and expense recognition. Moreover, construction projects frequently encounter delays or changes that can impact financial reporting periodically.
Work-in-Progress (WIP)
At the core of construction accounting lies the job cost report, often referred to as the work-in-progress schedule. To create this report, your company must meticulously track both actual costs incurred and budgeted costs for each project, recording this data in your accounting software for ongoing reporting. Direct costs such as materials and labor are typically allocated to specific project codes. Given the numerous performance obligations inherent in customer contracts, it's crucial to allocate the transaction price over time accurately.
Revenue Recognition
Consider a scenario with a $100,000 contract and an estimated cost of $75,000. Billing terms stipulate $50,000 due in February after project commencement and another $50,000 in May. Recognizing revenue at the time of billing while costs accumulate over months can result in a negative profit position for the company. Therefore, construction accountants must possess a strong grasp of cost accounting to generate precise job cost reports, providing management with an accurate financial overview of each project.
5 Principles of ASC 606
To address these challenges and more, the Financial Accounting Standards Board (FASB) introduced Accounting Standards Codification (ASC) 606. This standard is guided by five key principles.
In adapting to this new standard, you'll need to make adjustments to your construction accounting procedures. Key considerations include tracking progress billings and lien releases separately from other revenue and expenses, recognizing revenue as work progresses rather than upon invoice creation, and maintaining detailed contract documentation, including change orders.
You will need to track progress billings and lien releases separately from other revenue and expenses.
Revenue should be recognized as work is completed, rather than when the invoice is created.
You will need to maintain detailed documentation of the contract, including any change orders that are made.
If you're not sure where to start, check out our blog post ASC 606: Comprehensive Guide to Revenue Recognition. The FASB website offers several helpful publications, and your accounting software provider may also have information and resources to help you get started.
When navigating the intricate landscape of financial reporting in the construction industry, having a trusted partner like Global Finance Team (GFT) by your side can make all the difference. Our expertise in construction accounting, coupled with a deep understanding of ASC 606 and other industry-specific standards, empowers your business to achieve accurate and compliant financial reporting. We offer tailored solutions, comprehensive guidance, and a commitment to ensuring that your financial processes align seamlessly with the principles of ASC 606. With GFT as your strategic partner, you can confidently navigate the complexities of construction accounting, enhance your financial reporting accuracy, and focus on building a brighter financial future for your business.