Clarifications on Accounting Rules for Retainage

Ongoing Uncertainty Around Retainage

The implementation of ASC 606 has brought about vast changes in how companies, particularly those in the construction industry, account for contracts with customers. Despite 6 years of ASC 606 implementation for private companies, there are still uncertainties that remain regarding proper accounting treatments.

The primary point of uncertainty regards retainage, as the required netting of contract assets and liabilities can obscure this information. In early 2025, the Financial Accounting Standards Board (FASB) and Private Company Council (PCC) discussed the possibility of revising the accounting standards to provide more clarity on this matter. The PCC has advised the FASB to drop this proposal. Instead of a revision, they have provided more concise and clear guidance on presentation and disclosure requirements for retainage in a staff educational paper.

Disclosure Recommendations

The paper acknowledges that retainage information may be obscured by the netting of contract assets and liabilities. To address this, the FASB has advised the following disclosures:

Subtotals: Companies may use subtotals on the face of the balance sheet to provide additional information to users about the contract asset and contract liability balances.

Parenthetical Disclosures: Companies may provide the retainage amount in parentheses as part of the contract assets and liabilities disclosures on the balance sheet. For an example, “Contract Assets, including conditional retainage of ($XX) and $(XX) at December 31, Year I and Year II, respectively”.

Alternate Descriptions: While the terms “contract asset” and “contract liability” are commonly used, they are not required. Alternative terms, such as “billings in excess of revenue” or “revenue in excess of billings”, may be used on the face of the balance sheet.

Additional Disclosure Guidance from ASC 606

Additional Disclosures: ASC 606-10-50-8 through 50-10 and ASC 910-10-50-7 are all appropriate disclosures for contract balances:

606-10-50-8 An entity shall disclose all of the following:

• The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed.
• Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period.

606-10-50-9 An entity shall explain how the timing of satisfaction of its performance obligations relates to the typical timing of payment and the effect that those factors have on the contract asset and contract liability balances. The explanation provided may use qualitative information.

606-10-50-10 An entity shall provide an explanation of the significant changes in the contract asset and the contract liability balances during the reporting period. The explanation shall include qualitative and quantitative information. Examples of changes in the entity’s balances of contract assets and contract liabilities include any of the following:

• Changes due to business combinations
• Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification.
• Impairment of a contract asset
• A change in the time frame for a right to consideration to become unconditional (that is, for a contract asset to be reclassified to a receivable).
• A change in the time frame for a performance obligation to be satisfied (that is, for the recognition of revenue arising from a contract liability).

910-10-50-7 If receivables include amounts representing balances billed but not paid by customers under contract retainage provisions, a contractor shall disclose, either in the balance sheet or in a note to financial statements, all of the following:

• The amounts
• The portion, if any, expected to be collected after one year
• If practicable, the years in which the amounts are expected to be collected.

Additionally, entities are permitted to disaggregate contract balances within the notes to the financial statements.

Conclusion

In closing, while the proposed revisions have been dropped, these key clarifications should provide a more unambiguous picture of presentation and disclosure requirements for retainage.

Questions? Contact your Keiter Opportunity Advisor.