On April 1, 2025, FASB released an educational paper to clarify the presentation and disclosure of retainage for construction contractors. While the paper does not change existing GAAP, it provides important guidance on how to apply these rules effectively.
This paper was issued in response to feedback from private company stakeholders, financial statement users, and sureties in the construction industry regarding the application of Topic 606 guidance for retainage.
Key Takeaways
1. Contract Asset or Liability: Under Topic 606, when a construction contractor enters into a contract, any remaining rights and performance obligations must be presented on a net basis as either a contract asset or contract liability. This should be done on a contract-by-contract basis. For example:
- If a contract has overbillings and retainage, they should be presented on the net basis for that contract.
2. Receivable Classification: Topic 606 specifies that a receivable represents an unconditional right to consideration. Retainage can be classified in one of two ways depending on whether the contractor’s right to payment is unconditional:
- Unconditional: Classified as a receivable.
- Conditional: Included within a contract asset or liability balance.
Why This Matters
This clarification ensures that construction contractors accurately report retainage and contract balances in compliance with GAAP. While it doesn’t change existing standards, it provides additional guidance for more detailed and consistent disclosures.
If you need further guidance or have any questions on these topics, we are here to help. Please do not hesitate to reach out to discuss how this clarification may impact your financial statements.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
