ASC

ASC 605-35

Construction-Type and Production-Type Contracts

605 Revenue Recognition

Download JSONDownload Markdown146 paragraphs · 9 sectionsJump to summary

Source downloaded: .Record version 81dfce759894. Effective date must be checked in the source.

In brief

IntermediateRevenueRecognitionPresentationContingencies and guarantees

After ASU 2014-09 superseded the old percentage-of-completion/completed-contract revenue guidance, ASC 605-35 survives only as the loss-provision guidance for construction-type and production-type contracts — contracts built to a customer's specifications. Its core rule is that when current estimates of the consideration expected (measured under Topic 606's transaction price principles, without the variable consideration constraint, and adjusted for customer credit risk) fall below estimated contract costs, the entire anticipated loss is recognized immediately in the period it becomes evident. The subtopic also specifies whether the loss is measured at the contract, combined-contract, or performance obligation level, and how the provision is presented in the income statement and balance sheet.

Key points (7)
  • Scope covers all contractors performing contracts for which specifications are provided by the customer — construction, ships, aerospace/electronic equipment, construction consulting, architectural/engineering services, and software arrangements requiring significant production, modification, or customization (605-35-15-1 through 15-3); third-party or marketplace-imposed specifications count as buyer's specifications.
  • Excluded are standard manufactured goods sold through regular channels, supply contracts from inventory or continuing production, program-method contracts, consumer service contracts, magazine subscriptions, NFP membership arrangements, leases and other topics with special methods, and federal/cost-plus-fixed-fee government contracts under Topic 912 (605-35-15-6).
  • The entire anticipated loss on a contract must be recognized as soon as the loss becomes evident — that is, in the period the estimated consideration less estimated contract cost indicates a loss (605-35-25-45; 605-35-25-46).
  • The expected consideration is measured using Topic 606's transaction price determination and allocation guidance in 606-10-32-2 through 32-27 and 32-28 through 32-41, but excluding the constraint on variable consideration in 606-10-32-11 through 32-13, and is adjusted for the effects of the customer's credit risk (605-35-25-46A).
  • Contracts are combined for loss purposes only if they meet the criteria in 606-10-25-9 (605-35-25-7); otherwise the loss is measured at the contract level, and an entity may make an accounting policy election, applied consistently to similar contracts, to measure loss provisions at the performance obligation level instead (605-35-25-47).
  • Estimated loss costs include all costs allocable to contracts under 340-40-25-5 through 25-8, plus consideration of variable consideration such as target penalties and rewards and price redeterminations, nonreimbursable costs on cost-plus contracts, and change orders accounted for as modifications under 606-10-25-10 through 25-13 (605-35-25-49); cost-type contracts can generate losses through guaranteed maximum reimbursable costs or performance penalties (605-35-25-48).
  • Presentation: the provision is reported as additional contract cost (a component of cost in computing gross profit), not as a reduction of contract revenue, and is not shown separately unless material or unusual/infrequent (605-35-45-1); significant loss provisions are shown as a current liability on a classified balance sheet unless deducted from related accumulated costs (605-35-45-2).

For students. Students often assume ASC 605-35 was wholly wiped out by ASC 606 — in fact it is the one piece of legacy construction-contract guidance that lives on, providing the only U.S. GAAP onerous-contract rule for these contracts (ASC 606 itself has none). The trap is measurement: you use Topic 606's transaction price mechanics but deliberately ignore the variable consideration constraint and add a credit-risk adjustment, and the loss is measured at the contract level unless you elect the performance obligation level.

provision for anticipated contract lossconstruction-type and production-type contractscustomer specificationscontract combinationperformance obligation level policy electiontransaction price without variable consideration constraintcustomer credit risk adjustmentonerous contract presentation

Machine-generated study aid for ASC 605-35. Check the source paragraphs below.

605-35-00Status

Source downloaded: .Record version 249c33ce8d67. Effective date must be checked in the source.

605-35-00-1
The following table identifies the changes made to this Subtopic.
Paragraph Action Accounting Standards Update Date
Contract Added Accounting Standards Update No. 2014-09 05/28/2014
Customer Added Accounting Standards Update No. 2014-09 05/28/2014
Performance Obligation Added Accounting Standards Update No. 2014-09 05/28/2014
Profit Center Superseded Accounting Standards Update No. 2014-09 05/28/2014
Revenue Added Accounting Standards Update No. 2014-09 05/28/2014
605-35-05-1 Amended Accounting Standards Update No. 2014-09 05/28/2014
605-35-05-2 through 05-13
 Superseded Accounting Standards Update No. 2014-09 05/28/2014
605-35-15-2 Amended Accounting Standards Update No. 2014-09 05/28/2014
605-35-15-3 Amended Accounting Standards Update No. 2014-09 05/28/2014
605-35-15-6 Amended Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-1 through 25-6
 Superseded Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-7 Amended Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-8 Superseded Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-9 Superseded Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-10 Amended Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-11 through 25-44
 Superseded Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-45 Amended Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-46 Amended Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-46A Added Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-47 Amended Accounting Standards Update No. 2016-20 12/21/2016
605-35-25-47 through 25-49
 Amended Accounting Standards Update No. 2014-09 05/28/2014
605-35-25-50 through 25-99
 Superseded Accounting Standards Update No. 2014-09 05/28/2014
605-35-45-3 through 45-5
 Superseded Accounting Standards Update No. 2014-09 05/28/2014
605-35-50-1 through 50-11
 Superseded Accounting Standards Update No. 2014-09 05/28/2014
605-35-55-1 through 55-10
 Superseded Accounting Standards Update No. 2014-09 05/28/2014

605-35-05Overview and Background

Source downloaded: .Record version 356618da9a3b. Effective date must be checked in the source.

605-35-05-1
This Subtopic provides guidance on the accounting for a provision for losses on a contract for which specifications are provided by the customer for the construction of facilities or the production of goods or for the provision of related services.

605-35-15Scope and Scope Exceptions

Source downloaded: .Record version b9033f410d60. Effective date must be checked in the source.

Entities

605-35-15-1
The guidance in this Subtopic applies to all contractors.

Types of Contracts

605-35-15-2
The guidance in this Subtopic applies to:
  1. a
    The performance of contracts for which specifications are provided by the customer for the construction of facilities or the production of goods or the provision of related services. However, it applies to separate contracts to provide services essential to the construction or production of tangible property, such as design, engineering, procurement, and construction management (see paragraph 605-35-15-3 for examples). Contracts covered by this Subtopic are binding agreements between buyers and sellers in which the seller agrees, for compensation, to perform a service to the buyer's specifications. Specifications imposed on the buyer by a third party (for example, a government or regulatory agency or a financial institution) or by conditions in the marketplace are deemed to be buyer's specifications.
605-35-15-3
Contracts covered by this Subtopic include, but are not limited to, the following:
  1. a
    Contracts in the construction industry, such as those of general building, heavy earth moving, dredging, demolition, design-build contractors, and specialty contractors (for example, mechanical, electrical, or paving). In general the type of contract here under consideration is for construction of a specific project. While such contracts are generally carried on at the job site, this Subtopic also would be applicable in appropriate cases to the manufacturing or building of special items on a contract basis in a contractor's own plant.
  2. b
    Contracts to design and build ships and transport vessels.
  3. c
    Contracts to design, develop, manufacture, or modify complex aerospace or electronic equipment to a buyer's specification or to provide services related to the performance of such contracts.
  4. d
    Contracts for construction consulting service, such as under agency contracts or construction management agreements.
  5. e
    Contracts for services performed by architects, engineers, or architectural or engineering design firms.
  6. f
    Arrangements to deliver software or a software system, either alone or together with other products or services, requiring significant production, modification, or customization of software.
605-35-15-4
Contracts covered by this Subtopic may be classified into four broad types based on methods of pricing:
  1. a
    A fixed-price contract is an agreement to perform all acts under the contract for a stated price.
  2. b
    A cost-type (including cost-plus) contract is an agreement to perform under a contract for a price determined on the basis of a defined relationship to the costs to be incurred, for example, the costs of all acts required plus a fee, which may be a fixed amount or a fixed percentage of the costs incurred.
  3. c
    A time-and-material contract is an agreement to perform all acts required under the contract for a price based on fixed hourly rates for some measure of the labor hours required (for example, direct labor hours) and the cost of materials.
  4. d
    A unit-price contract is an agreement to perform all acts required under the contract for a specified price for each unit of output.
605-35-15-5
Each of the various types of contracts may have incentive, penalty, or other provisions that modify their basic pricing terms. The glossary definitions for each of the contract types listed in the preceding paragraph contain greater detail about the pricing features.
605-35-15-6
Contracts not covered by this Subtopic include, but are not limited to, the following:
  1. a
    Sales by a manufacturer of goods produced in a standard manufacturing operation, even if produced to buyers' specifications, and sold in the ordinary course of business through the manufacturer's regular marketing channels, if such sales are normally recognized as the sale of goods and if their costs are accounted for in accordance with generally accepted principles of inventory costing.
  2. b
    Sales or supply contracts to provide goods from inventory or from homogeneous continuing production over a period of time.
  3. c
    Contracts included in a program and accounted for under the program method of accounting. For accounting purposes, a program consists of a specified number of units of a basic product expected to be produced over a long period in a continuing production effort under a series of existing and anticipated contracts.
  4. d
    Service contracts of health clubs, correspondence schools, and similar consumer-oriented entities that provide their services to their clients over an extended period.
  5. e
    Magazine subscriptions.
  6. f
    Contracts of not-for-profit entities (NFPs) to provide benefits to their members over a period of time in return for membership dues.
  7. g
    Contracts for which other Topics in the Codification provide special methods of accounting, such as leases.
  8. h
    Cost-plus-fixed-fee government contracts, which are discussed in Topic 912, other types of cost-plus-fee contracts, or contracts such as those for products or services customarily billed as shipped or rendered.
  9. i
    Federal government contracts within the scope of that Topic.
  10. j
    Service transactions between a seller and a purchaser in which, for a mutually agreed price, the seller performs, agrees to perform at a later date, or agrees to maintain readiness to perform an act or acts, including permitting others to use entity resources that do not alone produce a tangible commodity or product as the principal intended result (for example, services, not plans, are usually the principal intended result in a transaction between an architect and the customer of an architect).

605-35-20Glossary

Source downloaded: .Record version bf80daccfc71. Effective date must be checked in the source.

605-35-25Recognition

Source downloaded: .Record version 7cf9c2803b8c. Effective date must be checked in the source.

Combining Contracts

605-35-25-7
Contracts shall be combined to determine the need for a provision for losses in accordance with paragraphs
605-35-25-45 through 25-49
only if they meet the criteria in Topic 606 on revenue from contracts with customers, specifically paragraph 606-10-25-9.

Identifying Performance Obligations

605-35-25-10
A single contract or a group of contracts that otherwise meet the criteria for combining (see paragraph 605-35-25-7) may include more than one performance obligation, identified in accordance with Topic 606 on revenue from contracts with customers, specifically paragraphs
606-10-25-14 through 25-22
.

Provisions for Losses on Contracts

605-35-25-45
For a contract on which a loss is anticipated, an entity shall recognize the entire anticipated loss as soon as the loss becomes evident.
605-35-25-46
When the current estimates of the amount of consideration that an entity expects to receive in exchange for transferring promised goods or services to the customer, determined in accordance with Topic 606, and contract cost indicate a loss, a provision for the entire loss on the contract shall be made. Provisions for losses shall be made in the period in which they become evident.
605-35-25-46A
For the purpose of determining the amount that an entity expects to receive in accordance with paragraph 605-35-25-46, the entity shall use the principles for determining the transaction price in paragraphs
606-10-32-2 through 32-27
(except for the guidance in paragraphs
606-10-32-11 through 32-13
on constraining estimates of variable consideration) and allocating the transaction price in paragraphs
606-10-32-28 through 32-41
. In addition, the entity shall adjust that amount to reflect the effects of the customer's credit risk.
605-35-25-47
If a group of contracts are combined based on the guidance in paragraph 606-10-25-9, they shall be treated as a unit in determining the necessity for a provision for a loss. If contracts are not combined, the loss is determined at the contract level (see paragraph 605-35-25-45). As an accounting policy election, performance obligations identified in accordance with paragraphs
606-10-25-14 through 25-22
 may be considered separately in determining the need for a provision for a loss. That is, an entity can elect to determine provisions for losses at either the contract level (including contracts that are combined in accordance with the guidance in paragraph 606-10-25-9) or the performance obligation level. An entity shall apply this accounting policy election in the same manner for similar types of contracts.
605-35-25-48
Losses on cost-type contracts may arise if, for example, a contract provides for guaranteed maximum reimbursable costs or target penalties. In recognizing losses for accounting purposes, the contractor's normal cost accounting methods shall be used in determining the total cost overrun on the contract, and losses shall include provisions for performance penalties.
605-35-25-49
The costs used in arriving at the estimated loss on a contract shall include all costs of the type allocable to contracts under paragraphs
340-40-25-5 through 25-8
. Other factors that should be considered in arriving at the projected loss on a contract include all of the following:
  1. a
    Variable consideration, (for example, target penalties and rewards and potential price redeterminations)
  2. b
    Nonreimbursable costs on cost-plus contracts
  3. c
    Change orders that meet the guidance to be accounted for as contract modifications in accordance with Topic 606 on revenue from contracts with customers, specifically paragraphs
    606-10-25-10 through 25-13
    .
  4. d
    Subparagraph superseded by Accounting Standards Update No. 2014-09.

605-35-45Other Presentation Matters

Source downloaded: .Record version 1e2c8eff8dcc. Effective date must be checked in the source.

Provisions for Anticipated Losses on Contracts

605-35-45-1
The provision for loss arises because estimated cost for the contract exceeds estimated revenue. Consequently, the provision for loss shall be accounted for in the income statement as an additional contract cost rather than as a reduction of contract revenue, which is a function of contract price, not cost. Unless the provision is material in amount or unusual or infrequent in nature, the provision shall be included in contract cost and shall not be shown separately in the income statement. If it is shown separately, it shall be shown as a component of the cost included in the computation of gross profit.
605-35-45-2
Provisions for losses on contracts shall be shown separately as liabilities on the balance sheet, if significant, except in circumstances in which related costs are accumulated on the balance sheet, in which case the provisions may be deducted from the related accumulated costs. In a classified balance sheet, a provision shown as a liability shall be shown as a current liability.

605-35-50Disclosure

Source downloaded: .Record version 9fb91d87183c. Effective date must be checked in the source.

605-35-55Implementation Guidance and Illustrations

Source downloaded: .Record version d353c2c3bb44. Effective date must be checked in the source.

605-35-75GAAP Taxonomy Elements

Source downloaded: .Record version 3be79ae98aaf. Effective date must be checked in the source.

Related subtopics