Mike Goettsche and Brody Fitch from Cooper Norman’s Construction Team attended the AICPA Construction & Real Estate Conference held in Nashville on December 5th and 6th, 2019. The construction conference is the AICPA’s flagship event for providing information from leading industry professionals related to trends in the industry, practical implementation of accounting standards, and tax planning opportunities. Three key highlights:
State of the US Economy
The US economy continues to chug along, as it is currently in the 11th year of economic expansion. The construction industry has mostly recovered from the last recession, and demand for residential and commercial construction remains high, especially in the western states. Idaho experienced the 5th highest employment growth in the country over the last year. While this provides great opportunities for our construction companies, it also creates challenges for hiring and retaining our best people. Additionally, many leading economic indicators suggest that there may be a correction within the next 12-24 months. As we look forward to 2020, which should be another good year for construction, it will be important to start looking at areas to protect yourself from a downturn.
ASC 606 – New Revenue Recognition Standards
The new revenue recognition standards on long-term contracts are now effective for both public and private companies. As public companies are now entering their second year of reporting according to the new standards, speakers at the conference were able to provide some extremely valuable practical considerations for implementing the standard. Every construction company that has long-term contracts, regardless of size, will need to be aware of these changes so they can correctly record contract expenses and contract revenues according to the new standard. The changes may seem daunting, but after some evaluation of existing contracts, companies have been able to implement this standard with minimal impact. A few key considerations:
- Understanding if your contracts have multiple performance obligations
- Amortizing upfront costs (such as mobilization and bonding) over the length of the contract
- Adjusting contract value for variable consideration throughout the duration of the contract (ie liquidating damages, performance bonuses, etc)
Your Cooper Norman account team will work with you to make sure these items are addressed prior to getting financials to your financial institutions and bonding agents.
Tax Opportunities – Evaluating Tax Accounting Method
By and large, most companies determine their tax accounting method during their initial year of operation and largely leave it unchanged throughout the life of their business. Construction companies are unique in that they employ two accounting methods:
- The overall method that accounts for income from activity other than long-term contracts (ie Cash, Accrual, etc)
- Long-Term contract accounting method for contracts spanning over a tax year-end (ie Completed Contract, Percentage of Completion, etc)
There are some variations for each of these accounting methods that make sense to periodically evaluate. For instance, the limitations on a small company went from $10m to $25m in 2018, opening up the possibility for many companies to use the Completed Contract method. Additionally, a variation of the accrual overall method allows businesses to exclude retainage from revenue. In a year with large retainage at the end of the year, making this accounting change could be a winning strategy to defer taxes.
If you have questions on any of these items, please let us know how we can help you! Your success is our success!