Simplified Financial Reporting Likely to Return for Contractors

By Wesley Veigle, CPA

The construction industry is poised for a significant shift towards simplified financial reporting, thanks to the recent reaffirmation by the Private Company Council (PCC), an advisory board to the Financial Accounting Standards Board (FASB). This development is projected to simplify the financial reporting practices currently used by contractors.

Key Issues Addressed

The PCC has decided to concentrate on four key issues affecting U.S. private companies:

• New guidance on current expected credit losses (i.e., bad debt)
• Debt modifications and extinguishments
• Lease accounting
• Presentation of conditional retainage and overbillings as contract assets and liabilities

Impact on Retainage Provisions

Construction contracts often include retainage clauses, allowing customers to withhold part of the payment until the project is completed or specific milestones are met.

Under the existing reporting requirements, retainage is classified either as a contract asset or a receivable, depending on whether the payment is conditioned on the entity’s future performance. If classified as a contract asset, it must be netted with contract liabilities (overbillings) within the same contract for financial statement presentation.

This has caused confusion over gross retainage amounts and made it difficult for sureties to assess risk accurately.

The Proposed Accounting Alternative

To address these issues, the PCC has proposed an accounting alternative specifically for private construction contractors covered by ASC 910-10, Contractors-Construction. This alternative would allow privately held contractors to present contract assets and contract liabilities on a gross basis on the balance sheet, thereby reducing the complexity and confusion caused by the current reporting standards.

For instance, under the current standards, if a contractor has $100,000 in retainage classified as a contract asset and $50,000 in overbillings classified as contract liabilities, these amounts would be netted, resulting in a $50,000 net contract asset reported on the balance sheet.

Under the proposed alternative, the contractor would report the full $100,000 as a contract asset and the $50,000 as a contract liability, providing a clearer picture of the financial position.

Next Steps

Our professionals are diligently monitoring these developments and will keep clients informed about any changes that may impact reporting requirements. Should there be any questions or need for further clarification, clients are encouraged to reach out to any member of Boyer & Ritter’s Construction team.

Wesley Veigle, CPA, is a director at Boyer & Ritter with experience providing tax and accounting services for closely held businesses, especially in the construction and real estate industries. Reach Wes at 717.761.7210 or wveigle@cpabr.com