ASC 606 and Accounting for Uninstalled Materials

February 1, 2022 - The pandemic has greatly affected how some businesses operate. For construction companies, in particular, new issues surrounding uninstalled materials now emphasize the importance of properly applying the ASC 606 revenue recognition standard in financial planning and reporting. 

In the past, you could purchase materials needed for a job in a timely manner, knowing the materials would be used as soon as jobsite work progressed. However, the pandemic disrupted the supply chain worldwide, creating long delays and product shortages. To protect work schedules, your construction company may have resorted to sourcing and buying materials farther in advance and, in many cases, in larger quantities. As a result, your materials may be sitting on a jobsite for a long period of time.

While this ensures contracted work keeps moving forward, if your construction company has been stockpiling uninstalled materials, you should be tracking those materials by job. That way, you can identify what materials were uninstalled as of 12/31/21 to make any necessary adjustments for year-end reporting. Also, since it is reasonable to assume that supply chain constraints will continue to plague contractors for the foreseeable future, ASC 606 will be a key factor in accounting and reporting for 2022.

Accounting for Uninstalled Materials

If you are using the input method to measure progress toward completion, revenue recognition over time is adjusted only when costs are incurred which do not contribute to performance progress. This includes uninstalled materials, as they have not yet contributed towards completion. During this time they should be accounted for on your balance sheet as inventory assets.

If you have uninstalled materials, you may be able to recognize revenue up to cost if the following conditions are met:

1. The good is not distinct.
2. Your customer is expected to obtain control of the good significantly before receiving services related to the good.
3. The cost of the transferred good is significant relative to the total expected costs to completely satisfy the performance obligation.
4. You procure the good from a third party and are not significantly involved in designing and manufacturing the good (but the entity is acting as a principal in accordance with paragraphs 606-10-55-36 through 55-40).

If your uninstalled materials meet these conditions you can recognize revenue equal to cost by adjusting the measure of progress to exclude the related costs. The costs should be excluded from the costs incurred and from the transaction price (from both the numerator and the denominator in the percentage of completion calculation). Since the status of uninstalled materials will change over time, it’s important to track information about them for each reporting period when you close your books. 

Like construction work itself, ASC 606 is complex. There are multiple considerations that affect when and how uninstalled materials are accounted for, both for interim reporting and at year-end. Especially now as you get ready to prepare final reports for 2021 and plan for 2022, it is important to discuss this topic in detail with your accounting team.