Authored by Tom Sheahan and Erik Schuchardt
Under existing U.S. GAAP, a contractor had the ability but not the requirement to combine contracts. Under ASC 606, contracts will be required to be combined when certain criteria are met. The new accounting standard requires contracts be combined prior to further assessment of the five elements, if one or more of the following criteria are met:
- Negotiated at the same time with the same customer (or related party) with a single commercial objective in mind
- The consideration to be paid for one contract is dependent on another contract
- The promised goods and services in the contracts are a single performance obligation in accordance with the guidance
A scenario in construction
A design-build construction firm is negotiating the design and construction contracts for a commercial office building. The firm submits a bid to the project owner on Jan. 15, 2018 for the design services totaling $500,000. The firm submits a bid to the project owner for construction services on Jan. 30, 2018 totaling $8.5 million. The firm includes a provision in its construction services bid that indicates its bid price for construction services is contingent upon the project owner’s acceptance of the design services contract. Without the acceptance of the design services contract, the construction services bid price would be $8.75 million. The project owner accepts the design and construction services bids on Feb. 15, 2018 and enters into the contracts totaling $9 million.
The design and construction services contracts between the design-build firm and the project owner were negotiated at approximately the same time, with a single commercial objective in mind (the design and construction of a commercial office building). The amount of consideration to be paid by the project owner for the construction services is contingent on the acceptance of the consideration to be paid for the design services. The design and construction of a commercial office building is considered a single performance obligation in accordance with the guidance in the standard, since the goods or services are highly interdependent and interrelated. In this example, the criteria identified in the standard have been met. Accordingly, the total contract price of $9 million must be allocated to the design and construction contracts in amounts that differ from the contract price in the individual contracts.
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