Wiley GAAP 2008

Long‐Term Construction Contracts. Perspective and Issues

Accounting for long‐term construction contracts involves questions as to when revenue is to be recognized and how to measure the revenue to be recorded. The basic GAAP governing the recognition of long‐term contract revenue is contained in ARB 45, Long‐Term Construction‐Type Contracts, AcSEC Statement of Position 81‐1, Accounting for Performance of Construction‐Type and Certain Production‐Type Contracts, and the AICPA Audit and Accounting Guide for Construction Contractors.¹ In accordance with SAS 69, Accounting Research Bulletins (ARB) are “category A” (the highest level) GAAP, and SOP 81‐1 and the Audit and Accounting Guide are “category B” GAAP.

The accounting for long‐term construction contracts is complicated by the need to rely upon estimates of revenues, costs to be incurred, and progress toward completion.

Table . 10-1: Sources of GAAP

CON	ARB	APB	FAS	SOP
5	45	20	109	81‐1, 98‐5

Definitions of Terms

Back charges	Billings for work performed or costs incurred by one party (the biller) that, in accordance with the agreement, should have been performed or incurred by the party billed.
Change order	A legal document executed by a contractor and customer (which can be initiated by either) that modifies selected terms of a contract (e.g., pricing, timing and scope of work) without the necessity of redrafting the entire contract.
Claims	Amounts in excess of the agreed contract price that a contractor seeks to collect from customers for ...