Understanding FASB’s Guidance on Retainage for Construction Contractors
Published on by Matt Rosen in Construction
All construction contractors are familiar with retainage, where a portion of payment is withheld until a certain milestone is reached on a project. While the practice has its benefits for both contractors and project owners, it also comes with challenges, such as complex accounting and escrow issues in an industry that already often experiences cash flow issues.
In a move to help contractors better navigate the financial challenges of this practice, the Financial Accounting Standards Board (FASB) has released an educational paper aimed at clarifying the presentation and disclosure requirements for retainage under U.S. generally accepted accounting principles (GAAP). This paper addresses key concerns raised by private company stakeholders in the construction industry regarding the application of revenue recognition guidance to retainage, providing valuable insights for construction contractors and those involved in preparing their financial statements.
Let’s walk through the highlights.
About the new educational paper
Newly released on April 1, 2025, the FASB Staff Educational Paper has two main goals:
- Clarify presentation and disclosure requirements: It elucidates the current GAAP regarding retainage for construction contractors.
- Provide example voluntary disclosures: The paper offers examples of voluntary disclosures that would be permissible under GAAP, giving users more detailed information about contract assets and contract liability balances.
It’s important to note that this paper does not change or modify current GAAP. Instead, it aims to provide clarity and guidance while considering entity-specific facts and circumstances.
Accounting for ASC 606
The paper starts with an overview of Topic 606, which requires entities to account for and present the remaining rights and performance obligations of a contract with a customer on a net basis as either a contract asset or a contract liability.
- Contract asset: an entity’s right to consideration in exchange for goods or services already transferred to a customer, conditioned on non-time-based milestones, like future performance.
- Contract liability: an entity’s obligation to transfer goods or services to a customer for which consideration has been received or is due.
Determining whether retainage should be classified as a receivable or included within contract asset or contract liability balances depends on whether the entity’s right to payment is unconditional. Retainage is considered unconditional if the company’s entitlement to payment depends solely on the passage of time.
Under Topic 606, an entity’s unconditional right to consideration is considered a receivable, which affects the presentation and disclosure requirements under GAAP.
Refining presentation requirements
The paper goes on to clarify that determining whether the contract is presented as an asset or liability depends on the relationship between the entity’s performance and the customer’s payment. If your retainage qualifies as an unconditional right to consideration, it gets presented separately as a receivable. This analysis is done on a contract-by-contract basis.
Ultimately, an entity may present both contract assets and liabilities on its balance sheet, but not for the same contract, and any unconditional rights are presented separately as a receivable.
Disclosure requirements defined
The FASB’s paper further provides disclosure requirements for contract balances, which include:
- Opening and closing balances of receivables, contract assets, and contract liabilities
- Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period
- Explanation of the timing of satisfaction of performance obligations and timing of payment
- Explanation of significant changes in contract asset and contract liability balances
Additionally, for unconditional retainage classified as a receivable, the guidance requires disclosures such as the amount of retainage, the portion expected to be collected after one year, and the years in which the amounts are expected to be collected.
Addressing additional presentations and disclosures
This reporting alone is compliant, but without additional clarifications, both your financial team and your financial statement users may be missing out on essential details.
The FASB mentions that users of private construction company financial statements have indicated that the presentation and disclosure requirements do not always provide decision-useful information because the netting of contract assets and liabilities can obscure information about retainage.
To address this, the paper states that you may want to consider supplementing required presentation and disclosure with additional voluntary information.
Some examples of permissible voluntary presentation and disclosures under GAAP include:
- Parenthetical disclosure: Including parenthetical disclosure of the amount of retainage in contract assets and liabilities on the balance sheet.
- Use of subtotals: Utilizing additional line items to present contract assets and liabilities, providing more information about those balances.
- Alternative descriptions: Using terms such as billings in excess of revenue or revenue in excess of billings on the balance sheet.
- Additional disclosures in the notes: You can provide detailed disclosures about contract balances within the notes to the financial statements.
These addenda can greatly improve the understanding of financial data, helping your team and users alike make the most informed decisions possible.
Overall, the new Topic 606 Educational Paper provides helpful guidance for construction contractors navigating the complexities of retainage under the accounting standards. For more detailed information, we encourage you to refer to the full FASB Staff Educational Paper: Presentation and Disclosure of Retainage for Construction Contractors.
However, entity-specific facts and circumstances should be considered when applying the guidance. Our experienced construction pros are here to help. Contact our talented team for a free consultation to help you navigate the ins and outs of retainage reporting and compliance.
Additional construction resources
Our team is dedicated to providing high-quality, timely resources and advice for our construction clients. Check out our blog for thought leadership and financial updates in the construction industry.
We also conduct and publish a free compensation and benefits study every two years to help construction companies identify industry trends and strategies to retain top talent. This 50+ page report examines financial benchmarks, compensation by job title, benefits provided, and issues facing the industry. Request your complimentary copy of the 2024 study today.
