Implementation of FASB ASC Topic 606 using the modified retrospective transition method

Originally issued in 2014, ASC 606 is now being implemented on a larger scale with more companies required to report. Here are some key elements you need to know, steps to take, and items to consider. Contact our team if you have any questions. 

What is the modified retrospective method?

• An alternative to Topic 606’s full retrospective approach employed when adopting the new accounting principles.
• A method where the impact of change in accounting principle is reported as a cumulative, catch-up adjustment to beginning retained earnings in 2019. 
• An approach that differs from the full retrospective method in that prior year financial statement revenues and contract assets and liabilities are not restated. Instead, disclosure is required of differences in each line of the financial statements causing revenue recognized in 2019 under Topic 606 to differ from revenue that would have been reported using former accounting guidance.

First steps

• Alert your surety, bonding agent, lender, and other financial statement users of intent to implement Topic 606 using the modified retrospective approach.
• If changes in revenue and contract assets and liabilities are expected to be significantly different under Topic 606, consider presenting single year financial statements and implementation using the full retrospective approach to ease disclosures; check with financial statement users to inform and gain acceptance from all stakeholders. 
• Coordinate adoption policy elections with any joint venture managers.

Elections in conjunction with implementation to document in a policy

• Choose to apply to all contracts at the date of initial implementation (January 1, 2019 for calendar year private companies) or apply only to contracts that weren’t complete at date of initial implementation. We recommend Topic 606 guidance be applied only to contracts in process at date of initial implementation (contracts uncompleted at January 1, 2019).
• Recognize incremental costs of obtaining a contract as contract expenses if the period of amortization remaining at date of initial Topic 606 inception was one year or less.
• Elect to ignore calculation of any financing component if payments are expected to be received within one year of when the good or service is delivered to the owners. Retainage is not considered financing; it is, instead, considered to be a mechanism employed by the owner to help ensure the job is completed.
• Choose not to restate projects started and completed within same annual reporting period. Why important? Alerts users and readers that interim results ignore possible differences during interim periods and year end.

Document adoption of the practical expedient in a policy

Elect not to retrospectively restate contracts for contract modifications before the beginning of the earliest period presented; instead reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to performance obligations. Election of this practical expedient does require that disclosures include an explanation of, to the extent possible, the aggregate effect of all contract modifications that occur prior to the date of initial implementation; disclosures can be just qualitative, or can include quantitative amounts.

Set thresholds within a policy 

Caution: Consider need to set thresholds for each contract type/division and update all annually. Also, the possible effects of all that is below the thresholds need to be immaterial in all respects to the financial statements.

• Set a threshold at which Finance will perform a deeper contract review – e.g., contract value of at least $X (say 0.5% to 1% of forecasted revenues) and # months duration.
• Set a threshold at which contract modifications (change orders, etc.) will be reviewed by Finance for Topic 606 considerations - $X and # months duration.
• Set a threshold at which uninstalled materials will be separately tracked and reported - say ≥ 15% (or a lesser percentage) of contract value on contracts of at least $X and # months duration.
• Set a threshold to capitalize fulfillment costs for amortization (e.g., bonds, mobilization, specialized equipment, etc.) – say ≥ 5% (or a lesser percentage) of contract value on contracts of at least $X.
• Set a threshold for separately reporting rework or waste – say ≥ 5% (or a lesser percentage) of total estimated contract costs, excluding rework or waste and greater than $X.

Highlights of disclosures related to implementation

As described in FASB ASC 606-10-50-1, the objective of disclosures required “is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Visit Topic FASB ASC 606-10-50 for complete information regarding all new or changed required disclosures.

• Disclose adoption of Topic 606, the initial implementation date (i.e. January 1, 2019 for calendar year ends) and the nature and reason for the change in accounting principle. 
• Update all legacy-GAAP revenue and contract-related balance disclosures, qualitative information about performance obligations and also indicate Topic 606-specific policies elected and the practical expedient adopted (see above).
• Add disclosures on differences in each line of the financial statements causing revenue recognized in 2019 under Topic 606 to differ from revenue that would have been reported using former accounting guidance and include explanations of the reasons for any significant differences. If management appropriately and accurately believes there are no such differences under Topic 606, we suggest it is best practice to disclose that belief to the reader.
• Disclosures on changes in estimates continue to be required as well as disclosure of significant changes in performance obligation timeframe associated with contract liabilities.
• Add new, required disclosure of disaggregated revenue – revenue recognized by timing of transfer of goods or services to customers (minimally, total revenue recognized for goods or services transferred at a point in time and total revenue associated with goods or services transferred over time).
• Again, visit FASB ASC 606-10-50 for complete new or changed disclosure requirement information. There are even more required disclosures for public companies than private companies, including revenue by geographic region and market segment; public company-only disclosures are optional for private companies, but you could consider including some or all public company disclosures if they are useful to, or desired by users of the financial statements.