Key Points

  • The Financial Accounting Standards Board (FASB) on Tuesday issued a report clarifying how companies should applygenerally accepted accounting principles to construction contracts that include retainage provisions, according to a press release. Retainage, also known asretention or holdback, refers to a portion of payment withheld by a customer until a project reaches specific milestones, a common practice in the construction industry.
  • The FASB staff educational report does not change or modify GAAP standards and aims to answer how construction companies should apply revenue recognition guidance to such provisions. The report stems from input provided by stakeholders and the Private Company Council (PCC), the 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 contract assets or contract liabilities on the balance sheet and related disclosures, but Topic 606 does not include specific guidance for retainage," the four-page document states. Thus, the report fills a gap and explains the presentation and disclosure requirements for typical construction contracts under GAAP.

In-Depth Analysis

Accounting related to revenue recognition has historically been one of the tricky areas where financial report preparers are prone to errors. According to a report by economic consulting firm Cornerstone Research, in fiscal year 2024, the most common allegations in U.S. Securities and Exchange Commission (SEC) enforcement actions involved companies'revenue recognition and internal accounting controlsissues.

As for the Private Company Council, its annual report shows that the body listed efforts to advance the presentation of contract assets andcontract liabilitiesfor construction contractors as one of its key achievements last year.

The report notes that when a company enters into a contract with a customer, the rights and performance obligations in that agreement should be "presented on a net basis as a contract asset or contract liability." Additionally, the report clarifies that only unconditional amounts due can be considered receivables.

The report also mentions that some users of financial statements of private construction companies have indicated that the net presentation of contract assets and contract liabilities can sometimes make it difficult to interpret retainage information, and therefore suggests that companies may consider providing additional information to explain the situation.

The report states that examples of voluntary supplemental presentation disclosures permitted under GAAP include disclosing the retainage amount in parentheses, using subtotals, or adding line items on the balance sheet such as "revenue in excess of billings" or "billings in excess of revenue."

FASB spokesperson Christine Klimek said it is not uncommon for the FASB to issue documents to clarify issues raised by stakeholders. In March 2021, the board issued a document detailing the intersection ofenvironmental, social, and governancematters with financial accounting standards.