What Can Be Learned From Early Adopters of ASC 606?

Public companies were required to adopt the new revenue recognition standards by January 1, 2018, while private companies have an extra year (January 1, 2019) before being required to adopt.  During 2017, a number of public companies elected to early-adopt Accounting Standards Codification (ASC) 606, and a few of these companies received comment letters from the Security and Exchange Commissions (SEC). 

While not all of these comment letters relate specifically to companies in the construction industry, private companies beginning the implementation process can still gain valuable insight.

Below are a few topics included in the SEC comment letters and how these comments may translate to private companies implementing ASC 606:

• Disaggregation of revenues – Specific guidance was not provided on how exactly the disaggregation of revenue should be disclosed.  Rather, each company will need to determine what level and categories of disaggregation provide the most clarity and transparency for the users of their financial statements.
• Point-in-time versus over-time recognition – While it may be unlikely that a contractor will no longer meet the criteria to recognize revenue over time, companies will be required to disclose the method used to recognize revenue as well as management’s basis for utilizing the method.  
• Costs to obtain and fulfill contracts – Assessment is needed to determine whether these are costs that are incurred only because the contract was obtained or whether these costs would have been incurred regardless of the company being successful or not in obtaining the contract.
• Variable consideration – Treatment of variable consideration has the potential to significantly impact contractors.  Variable consideration includes items such as liquidated damages, performance incentives, bonuses, etc. and is required to be reassessed each reporting period.  Management should include variable consideration in the contract value when it is probable that significant reversal of revenue will not occur.  In assessing the likelihood of variable consideration, management should consider internal (i.e., history with these types of contracts, etc.) and external factors (i.e., market volatility, weather, other factors outside of its control, etc.).  

While ASC 606 may not be effective for private companies until January 1, 2019, companies should have already begun the process of implementing the new standard.  Generally, companies have underestimated the time and cost associated with evaluating and implementing ASC 606, so the sooner you can begin the process the better.