Dive Brief:

• The Financial Accounting Standards Board issued a report Tuesday clarifying how companies should apply generally accepted accounting principles to construction contracts that include retainage provisions, according to a press release. Also called retentions or holdbacks, retainage refers to a portion of a client’s payment that is withheld until certain project milestones are reached, a common practice in the construction industry.   
• The FASB staff’s educational report, which does not change or modify GAAP standards, seeks to answer questions that have arisen on how construction firms should apply revenue recognition guidance to the provisions. It stems from input about the matter that came from stakeholders and the Private Company Council, an advisory body to the U.S. accounting standard setter on private company accounting matters. 
• “Topic 606, Revenue from Contracts with Customers, establishes guidance on the presentation of a contract with a customer on the balance sheet as a contract asset or a contract liability and related disclosures, but Topic 606 does not include specific guidance on retainage,” the four-page paper states. As such, the report fills in the gaps and explains GAAP presentation and disclosure requirements for typical construction contracts. 

Dive Insight:

Accounting related to revenue recognition generally has been one of the thornier areas that have tripped up financial report preparers. In fiscal year 2024, the most common allegations in Securities and Exchange Commission actions alleging violations were related to companies’ revenue recognition and internal accounting controls, according to a report from Cornerstone Research, an economic consulting firm. 

For its part, the PCC cited its efforts related to the presentation of contract assets and contract liabilities for construction contractors as one of the key areas of progress it made last year, according to its annual report. 

According to the report, when a company inks a contract with a customer, the rights and performance obligations of that agreement should be accounted for and presented “on a net basis as either a contract asset or a contract liability.” Further, it says payments must be unconditional to be considered receivables. 

The report also states that certain users of private construction financial statements said sometimes the netting of contract assets and contract liabilities can make it hard to interpret the information about holdbacks, suggesting that presenting and disclosing the information companies might want to provide added information to explain the situations. 

Examples of voluntary additional presentation disclosure information that would be allowed under GAAP would be parenthetical disclosures of the retainage’s value, the use of subtitles, or added information that detail information such as billing in excess of revenue or revenue in excess of billings on the company’s balance sheet, according to the report.  

It’s not unusual for the FASB to publish papers to help clarify issues raised by stakeholders, according to Christine Klimek, a board spokesperson. In March the board issued a paper detailing the intersection of environmental, social and governance matters with financial accounting standards.