The ASC 606 transition for construction contractors: Determining the transaction price – Noncash consideration
In many construction arrangements, a customer may choose to procure and provide a contractor certain goods or services that are necessary for the contractor to complete a project. In other circumstances, a contractor may purchase and pay for the required goods and services using a customer’s procurement and purchase functions. Noncash consideration would include a customer’s contribution of goods or services that are used in the fulfillment of a contract such as customer-furnished materials, equipment or labor if a contractor obtains control of the goods and services. The transaction price should include the effects of any noncash consideration identified in the contract.
The new accounting standard requires a contractor uses the transfer of control guidance to evaluate whether it obtains control of the goods or services, and consider whether it is serving in the capacity of a principal or an agent before concluding on noncash consideration.
When a contractor receives, or expects to receive, noncash consideration the fair value of the noncash consideration is included in the transaction price. The contractor is required to apply the principles of ASC 820, Fair Value Measurements, in measuring the fair value of the noncash consideration. If a contractor cannot reasonably estimate the fair value of noncash consideration, it should measure the noncash consideration indirectly by estimating the standalone selling price of the promised goods and services.
A scenario in construction
A contractor enters into a contract with a lumber yard customer to construct a warehouse. The contract terms allow the customer to provide a significant portion of the materials to be used during construction (i.e., lumber, siding, roofing and other construction materials). The cost of the materials is excluded from the contract price; however, the contractor assumes control of the materials and uses the materials to construct the building.
Conclusion
The contractor determines that it has assumed control of the materials because it is responsible for evaluating the quality of the materials before using them in the construction of the warehouse. The contractor should determine the fair value of the materials (or a reasonable estimate of the fair value based on the standalone selling price of the materials) to determine the amount of noncash consideration, which is likely greater than the cost of the materials to the customer. The value of the consumed materials should be included in contract costs and contract consideration (i.e., the transaction price or contract value) in equal amounts. The effect of including the noncash consideration in the contract totals results in increased revenue and increased cost. The project’s profit will not change; however, the inclusion of the noncash consideration in the contract totals may have a timing effect on the amount of profit recognized in a period while the warehouse is under construction and the performance obligation is satisfied over time.
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