ASC 912: Federal Government Contract Accounting

Accounting Standards Codification (ASC) 912 provides specialized guidance for entities engaged in contracts with the United States federal government. Doing business with the federal government introduces unique complexities because it operates under a distinct set of laws and regulations that dictate how it compensates its contractors. This regulatory environment creates specific risks and accounting challenges that necessitate a dedicated framework within U.S. Generally Accepted Accounting Principles (GAAP).

ASC 912’s purpose is to ensure financial reporting accurately reflects these agreements by addressing long-term performance obligations, cost-reimbursement rules, and potential contract modifications.

Scope and Applicability of the Standard

ASC 912 applies to entities that enter into contracts with the U.S. federal government and its agencies. A “government contractor” can be any business that provides goods or services under such an agreement, covering industries like manufacturing, construction, technology, and research and development. The standard governs the accounting for various federal contracts, including fixed-price contracts, where the contractor agrees to a set price, and cost-plus contracts, where the contractor is reimbursed for allowable costs plus a fee.

The guidance also extends to time-and-materials contracts and contracts with incentive fees. The defining characteristic for applying ASC 912 is that the counterparty is the U.S. federal government, which triggers a unique set of regulatory considerations.

Core Principles of Contract Accounting

The accounting for long-term federal government contracts centers on recognizing revenue and costs over the life of the project. For revenue recognition, contractors use a method that measures progress over time, reflecting the continuous transfer of control of goods or services. This is frequently done using a cost-to-cost approach, where revenue is recognized in proportion to the costs incurred relative to total estimated contract costs.

A central aspect of accounting under ASC 912 is the treatment of contract costs, which are categorized as either direct or indirect. The distinction in government contracting is cost allowability, governed by the Federal Acquisition Regulation (FAR), which outlines which costs are permissible to charge to a contract.

Costs deemed “unallowable” by the FAR, such as certain advertising or lobbying expenses, cannot be reimbursed by the government. These unallowable costs must be excluded from the costs used to measure progress and are expensed as incurred. Government agencies conduct audits to verify compliance, and failure to adhere can lead to financial penalties and adjustments to contract prices.

Accounting for Contract Modifications and Claims

Federal government contracts are often subject to changes, known as contract modifications, which can alter the scope, specifications, or price. When a modification occurs, the contractor must determine whether to account for it as a change to the existing contract or as a separate one. This determination depends on whether the additional goods or services are distinct and priced at their standalone selling price.

If a modification is not a separate contract, its financial impact is accounted for on a cumulative catch-up basis. This involves adjusting the total transaction price and the measure of progress, which can result in a one-time adjustment to revenue in the period the modification is approved.

Contractors may also have claims against the government for costs from unapproved changes, government-caused delays, or other disputes. Recognizing revenue from a claim requires a high degree of certainty. A contractor can only include amounts from a claim in the transaction price when it is probable that a significant reversal of cumulative revenue will not occur. This high threshold means that revenue from claims is often not recognized until the dispute is resolved or payment is virtually certain.

Financial Statement Presentation and Disclosures

Government contract accounting leads to specific line items on the balance sheet. When a contractor has recognized more revenue than it has billed to the government, it reports an asset commonly described as “costs and estimated earnings in excess of billings on uncompleted contracts.” Conversely, if billings to the government exceed the revenue recognized to date, the contractor reports a liability, often titled “billings in excess of costs and estimated earnings.”

These balance sheet accounts reflect the timing differences between revenue recognition, which is based on performance, and billing, which is based on contractual terms. Accounts receivable from the government are also presented, representing amounts that have been billed but not yet collected.

Financial statement footnotes must provide detail about the contractor’s involvement in government contracts. ASC 912 requires disclosure of the revenue recognition methods used, such as the specific input or output methods applied to measure progress. Contractors must also disclose information about their contracts, including the aggregate amount of transaction prices allocated to remaining performance obligations and any significant judgments made.

Disclosures related to uncertainties are also required, including information about potential adjustments to contract prices, the status of significant claims, and the potential impact of government audits or investigations.