ASC 606 and Accounting for Uninstalled Materials

Navigating the intricacies of construction finance has always been challenging, but ongoing shifts in the global supply chain constantly add  new layers of complexity. With the lingering effects of supply chain disruptions from the pandemic, construction companies are finding themselves grappling with a significant issue: uninstalled materials. These materials, purchased in advance to mitigate delays, now present unique challenges in financial planning and reporting, particularly regarding compliance with the ASC 606 revenue recognition standard.

In the past, procuring materials for a project was a straightforward process. However, the pandemic-induced supply chain disruptions led to prolonged delays and shortages, forcing construction firms to adapt by purchasing materials earlier and in larger quantities. Consequently, job sites became over stocked with materials awaiting installation for extended periods.

While this ensured contracted work kept moving forward, if your construction company had been stockpiling uninstalled materials, you should have been tracking those materials by job. That way, you could identify what materials were uninstalled and make any necessary adjustments for year-end reporting. 

While the supply chain has righted itself, construction companies still face the need to account for uninstalled materials on a per-project basis.

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. It is important to discuss this topic in detail with your accounting team when preparing final annual reports.