Presentation and Disclosure of Retainage for Construction Contractors

Introduction

Retainage provisions are a common practice in the construction industry. Retainage refers to a portion of the contract price withheld by the customer until the project reaches substantial completion or meets other specified milestones. The amount held back is typically defined in the contract and usually ranges between 5% and 10% but can sometimes be higher. Retainage is meant to create financial incentives for contractors to complete the project and offer protection for owners should problems arise during construction or for a specified amount of time after completion.

However, the use of retainage introduces complexities in financial reporting. Under Topic 606, Revenue from Contracts with Customers, retainage may be classified as a receivable or included within contract asset or contract liability balances.

If the right to the retained consideration is unconditional, then retainage should be classified as a receivable. Otherwise, retainage may be classified in contract asset, an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance).

Retainage may also be a decrease in contract liability, an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer.

Beyond classification, however, lies another challenge: how to present and disclose retainage on financial statements. The lack of explicit guidance on retainage disclosures under Topic 606 led to inconsistent interpretations among private company stakeholders in the construction industry.

To address this issue, the Financial Accounting Standards Board (FASB) staff recently issued an educational paper, Topic 606: Presentation and Disclosure of Retainage for Construction Contractors, to address these challenges. This paper aims to clarify how retainage should be presented and disclosed under current Generally Accepted Accounting Principles (GAAP).

FASB’s Educational Paper

Required Disclosures

In accordance with Accounting Standards Codification (ASC) 606-10-50-11 private companies can choose not to include detailed disclosures about revenue contracts in their financial statements. However, if they decide not to make these detailed disclosures, they still need to provide the disclosure in ASC 606-10-50-8(a):

The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed.

However, the staff emphasized that private construction companies are permitted to provide all disclosures outlined in ASC 606-10-50-8 through 50-10. These voluntary disclosures would provide increased granularity of contract assets and liabilities which would include relevant information related to retainage.

Regarding retainage that is included in receivables, the FASB pointed out that ASC 910-10-50-7 in Topic 910 Contractors—Construction requires disclosure, either in the balance sheet or in a note to the financial statements, of all the following:

a. The amounts

b. The portion, if any, expected to be collected after one year

c. If practicable, the years in which the amounts are expected to be collected” of any unconditional retainage provisions classified as receivables.

Additional Disclosures Permissible under GAAP

Topic 606 requires that when an entity enters a contract with a customer the remaining rights and performance obligations of that contract should be accounted for and presented on a net basis as either a contract asset or a contract liability. While this approach simplifies the presentation of the balance sheet, it can unintentionally obscure the impact of retainage, which is often embedded within larger contract asset or liability totals. This lack of visibility poses issues for users like sureties and lenders. For example, a $500,000 contract asset might include $200,000 of retainage, an important detail for assessing liquidity, bonding capacity, or compliance with loan covenants. Stakeholders argued that the existing disclosure requirements failed to provide sufficient transparency, leaving financial statement users without the granular data needed to evaluate these risks.

In response to this challenge, the FASB offered examples of voluntary presentation methods that private construction companies can adopt to enhance transparency related to retainage.

The first example is the use of parenthetical disclosures of the amount of retainage that is included in contract assets and liabilities on the face of the balance sheet. For example:

Contract assets, including conditional retainage of $[ ] and $[ ] at December 31, 20X1 and 20X0, respectively and, Contract liabilities, net of conditional retainage of $[ ] and $[ ] at December 31, 20X1 and 20X0, respectively.

The second example is the use of subtotals in the face of the balance sheet to add granularity to the presentation of contract assets and liabilities. Entities may add a line for each subtotal in contract assets and liabilities, including conditional retainage.

The third example is that the companies could use alternative account descriptions to contract asset and contract liability. The companies could use terms like billings in excess of revenue or revenue in excess of billings on the balance sheet. If a company uses alternative descriptions like these it must also provide sufficient information for a user of the financial statements to distinguish between receivables and contract assets.

The last example provided by the FASB is the use of additional disclosures in the notes to the financial statements. The FASB pointed out that the guidance does not prohibit an entity from disaggregating contract assets and liabilities within the notes to the financial statements. However, companies should not disaggregate individual contracts as contract assets and contract liabilities.

How can other industries interpret this paper?

The FASB pointed out that while this educational paper is focused on private construction companies, the discussion of permissible additional disclosures and examples provided above may be applicable to all entities and industries.

Conclusion

The FASB’s guidance ultimately served as a pragmatic compromise; it reaffirmed the core principles of Topic 606 but acknowledged the construction industry’s unique needs by endorsing flexible, user-friendly disclosures. By doing so, the paper bridged the gap between strict adherence to GAAP and the practical realities faced by contractors and their financial partners.

Resources:

FASB Staff Educational Paper Clarifies Guidance on the Presentation and Disclosure of Retainage for Construction Contractors

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