Tag Archives: FASB

Indirect Cost Series: Part Five – Additional Considerations

This is part five of a five-part series on indirect costs.

As we wrap up our series on indirect costs, it’s important to remember the key takeaways from parts one through four:

  • Indirect costs are costs that are directly attributed as construction costs but are not easily identifiable to specific contracts.
  • Indirect costs must be allocated in a systematic, rational, and consistent way by accumulating them into cost pools, then allocating based on cost drivers that have a strong relationship with the incurrence of costs.
  • Project bids should include estimated allocated costs to maximize contract price, which, in turn, will maximize profit.
  • Accurate budgeting must include the proper allocation of indirect costs in the budgeted amounts to accurately project revenue, costs and profit for each period.

In addition to the above points, the following items should be considered when evaluating indirect costs:

  • Tax Considerations – Generally Accepted Accounting Principles (GAAP) and the Internal Revenue Code (IRC) share similar treatments of indirect costs . The difference arises with the definition of indirect costs. The IRC has a bright line test that specifically notes what comprises indirect costs, whereby GAAP is governed by the Financial Accounting Standards Board’s (FASB) codification of what an indirect cost is.
  • Incorrect Allocation of Indirect Costs – If indirect costs are not properly allocated to jobs and charged to general and administrative expenses, the following items will occur:
    • Estimated contract costs and costs incurred will be understated, leading to an inflated gross margin on the project.
    • General and administrative expenses will be overstated.
    • Indirect costs will be under applied causing management reporting to not be accurate.
  • Federal Acquisition Regulations (FAR) & Cost Accounting Standards (CAS)  Considerations – If you are working on a federal contract governed by FAR or CAS, there are multiple rules regarding allowable and unallowable indirect costs and indirect cost rates that may apply to your construction business . Unallowable costs are often legitimate costs incurred by your business; however, they are costs related to doing business that the government will not reimburse you for as part of your contract (e.g., penalties, interest, meals and entertainment, and certain legal costs). You are not alone; many contractors doing business with the government incur these costs and are subject to these regulations and cannot include any unallowable costs in their billing, proposal or claim to the government . In doing so, you could be assessed penalties and fines. The regulations are rather lengthy and can be complex. Compliance is a must and you need to be sure that you have the right accounting system and practices in place.

Though considering indirect costs in your construction contracts may seem like a no-brainer, these costs can be overlooked since they may be related to all projects but not easily allocated to just one.    A concerted effort should be made to accurately estimate, allocate, and track these costs on a job-by-job basis to ensure accurate financial reporting, budgeting, and to remain in compliance with GAAP and other standards (FAR, CAS, etc.) that could be applicable to your construction business.

For more information regarding indirect costs and construction contracts, please contract Chris Fischer of Aronson’s Construction Real Estate Group at 301.231.6200.

Update: FASB Proposes Potential Deferral of the Effective Date of New Revenue Recognition Standard

On April 1, 2015, the Financial Accounting Standards Board (FASB) decided to defer the effective date of the new revenue standard, Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606).  This proposed one-year delay is intended to provide entities adequate time to effectively implement the new standard.

The new revenue standard, which was officially issued by the FASB in May 2014, standardizes how companies should recognize revenue in financial statements under US Generally Accepted Accounting Principles (GAAP).

As a result of the proposed deferral, public entities would apply the new revenue standard to annual reporting periods beginning after December 15, 2017 and the first interim period within the year of adoption.  Nonpublic entities would apply the new revenue standard to annual reporting periods beginning after December 15, 2018 and the interim periods within the year of adoption.

Additionally, the FASB decided to allow both public and nonpublic entities to adopt the new revenue recognition standard early, but not before annual periods beginning after December 15, 2016 (which was the original public entity effective date).

The Board directed its staff to prepare an exposure draft which will have a 30-day comment period for the proposed update.

For more information on this update or other accounting standards, please contact your Aronson advisor at 301.231.6200.

Is the New Goodwill Accounting Alternative Right for Your Construction Company?

goodwill_alternativeIn January, the Financial Accounting Standards Board (FASB) issued the first Accounting Standards Update (ASU) created specifically for private companies. Accounting for Goodwill: a consensus of the Private Company Council (ASU 2014-02), which simplifies the accounting for goodwill subsequent to a business combination, is an important change by the PCC. In the May-June 2014 issue of the VSCPA’s Disclosures magazine, Aronson accounting experts Bill Foote and David Semendinger offered a detailed analysis of this notable development, including:

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Lease Accounting Exposure Draft Faces Criticism

Lease Accounting

The Financial Accounting Standards Board and International Accounting Standards Board issued a revised Exposure Draft on May 16, 2013, recommending significant changes to lease accounting. The stated goal of the proposal is to better meet the needs of financial statement users by improving the transparency of lease accounting and increasing comparability between organizations.

The Exposure Draft proposes a dual approach to the recognition, measurement, and presentation of expenses and cash flows from leases. The distinction between capital and operating leases will be eliminated, and replaced with an asset/liabilities approach in which the right to use a specified asset is obtained in exchange for the obligation to pay rent.

Leases of assets that are deemed to consume more than an insignificant portion of the asset (e.g., equipment) will be classified as Type A leases. Lessees will generally recognize the lease as a nonfinancial asset at cost, and

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FASB Approves Revised Accounting Standard for Multi-Employer Pension Plans

On July 27, 2011 the Financial Accounting Standards Board (FASB) approved the revised accounting standard for Multi-Employer Pension Plans.  This standard was originally released for public comment in September 2010 and was met with some criticism from the construction industry, so much criticism in fact that the Construction Industry FASB Coalition (The Coalition) was formed.  The Coalition, led by several industry trade associations (as reported in our July 8, 2011 blog article), took on the FASB in an effort to remove several provisions of the standard.  The most notable stance was against the proposed standard’s requirement to disclose a withdrawal liability to plans that a company participates in.  The Coalition was successful in its negotiations as seen in the news release from the FASB regarding this accounting standard. 

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