Accounting for construction contracts is specific and unique, filled with many nuances not shared by other industries. Proper accounting in accordance with general accepted accounting principles (GAAP), is not only an effective way of managing your business, but also ensuring your contractor financial statements are comparable within the industry and support an unmodified auditor’s opinion.
Contractors should be aware of how the following items impact your company and financial statements.
Construction costs may include direct material and labor costs, subcontract costs when applicable, and costs related to indirect contract performance. These costs should be accounted for under the accrual method of accounting and allocated to the appropriate project as specified by the contract. Indirect costs in the form of overhead costs pose another concern for contractors and should be allocated to individual contracts in accordance with GAAP. A reference to common construction costs can be found in a previous article, “Understanding Contract Costs in Audits of Contractors”.
For construction companies operating as a C corporation, contractors must be aware of the issues impacting deferred taxes. Issues can range from uncertain tax positions, effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts, valuation allowances, and more.
As of December 2017, the Tax Cuts and Jobs Act (the Act) was signed into law which reduced the federal corporate income tax rate effective January 1, 2018. The Act impacts contractor financial statements reporting in accordance with GAAP, which may lead to re-measurements of deferred tax assets and deferred tax liabilities, as well as further possible adjustments to any valuation allowances.
Contractors should be aware of potential pitfalls impacting revenue recognition such proper selection of contract accounting method, cost to cost accounting concerns, and identification and implementation of the new revenue recognition standard.
Revenue recognition is a hot topic in recent years with the introduction of the Financial Accounting Standards Board’s (“FASB”) issuance of a new standard for revenue recognition, Accounting Standards Update (“ASU”) 2014-09. This much anticipated standard focuses on the complexities of revenue recognition and implementation in accordance with a unified, five step approach. Specifically for privately held companies, the new standard is effective for periods beginning after December 15, 2018, and will permit the use of either the retrospective reporting for previous periods or the cumulate effect transition method. The new standard will also lead to additional required disclosures. A reference to common required disclosures resulting from the new standard can be found in a previous article, “High Level Look at Disclosures Required for Revenue Recognition”.
Be familiar with these common issues impacting the construction industry from an accounting perspective. For more information regarding GAAP associated with contractors, please contact your Keiter representative, Brett Sinsabaugh, or Email | Phone: 804.747.0000.
Additional accounting news and information for Real Estate and Construction businesses
- Section 199A Proposed Regulations Released
- New Revenue Recognition Standard: Construction Industry Impact
- Tax Reform’s Changes to Building Improvements
- Real Estate and Construction Blog
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.