By Sean Jones

The Financial Accounting Standards Board (FASB) recently issued an educational paper to clarify the application of ASC 606 – Revenue from Contracts with Customers (ASC 606) regarding the presentation and classification of contract assets and liabilities, with particular attention being paid to retainage (amounts withheld on billings until certain performance conditions are met). This was done as the FASB received feedback that there was diversity in practice regarding the accounting for retainage.  While the paper does not create new requirements or change existing GAAP, it aims to clarify the standard for companies in industries (such as construction) where these issues are most prominent.

Under ASC 606, a contract asset arises when an entity has performed work but cannot yet bill the customer because certain conditions remain unmet. In contrast, a receivable exists when the right to payment is unconditional, typically requiring only the passage of time. The paper emphasizes the need to distinguish carefully between these two, especially when evaluating retainage. If retainage is dependent on performance milestones (such as completion of the project), it should be classified as a contract asset.  If collection is only dependent on the timing of payment, and no other performance conditions exist, it should be presented as a receivable.

In the paper, the FASB also reinforces the requirement to present contract assets and liabilities on a net basis per individual contract. This means that companies should not report both a contract asset and a liability for the same contract at the same time. The presentation must reflect the net position, taking into account unbilled work, billings in excess of revenue earned, and retainage.  A common issue that this paper seeks to clarify is the proper presentation when a contract has a contract asset for retainage as well as a contract liability for amounts billed in excess of revenues earned.  In this scenario, these amounts are required to be netted against each other until the contract has a single contract asset or liability balance.

Ultimately, this whitepaper serves as a practical interpretive aid, offering examples and illustrative guidance to help companies apply ASC 606 with greater confidence and uniformity.

Contact Sean Jones, Miller Cooper Senior Manager from our Construction group with any questions.