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Page | 5 determining whether an agreement meets the above criteria. The majority of typical construction contracts will meet the fi ve criteria above, however there may be instances where a contractor must make judgments regarding the criteria and it is important to be aware of these. For example, if a contractor provides fi nancing to a credit risk customer for the construction of a building, the contractor could possibly not recognize revenue until the customer's ability to pay has become probable. OVERVIEW Construction contractors are very familiar with contracts, however the new revenue recognition standard will require management to make additional judgments regarding when to recognize revenue associated with contracts. Accounting Standards Codifi cation (ASC) 606-10- 25-1 provides fi ve criteria that must be met for an agreement to be identifi ed as a contract: 1. Approval and commitment of the parties a. Must be legally enforceable b. Written, oral, or implied c. Certain termination clauses may demonstrate lack of commitment 2. Identifi cation of the rights of the parties a. The goods or services associated with the contract must be identifi ed 3. Identifi cation of the payment terms a. Not required to be fi xed or stated, but need to be determinable and enforceable 4. The contract has commercial substance a. Risk, timing, amount of the entities' future cash fl ows must be impacted by the execution of the contract 5. Collection of payment is probable a. Ability and intent of customer to pay the contract consideration ASC 606 excludes lease contracts, insurance contracts, fi nancial instruments, guarantees and nonmonetary exchanges. Laws and regulations vary across legal jurisdictions and should be considered when Identifying Contracts with Customers > COMBINATION OF CONTRACTS (ASC 606-10-25-9) Under current guidance a group of contracts may be combined for accounting purposes if all of the conditions below exist: 1. Contracts are negotiated as a package in the same economic environment with an overall profi t margin objective. Contracts not executed at the same time may be considered for combination only if the time period between commitments of the parties involved is reasonably short. 2. The contracts constitute, in essence, an agreement to do a single project. A project consists of construction, phases, or units of output that are closely interrelated.

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