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Page | 26 Uninstalled Materials > OVERVIEW Determining the amount and timing of revenue recognition as costs are incurred for uninstalled materials under a cost-to-cost input method under ASC 606 requires signifi cant judgment by the contractor based on the facts and circumstances present in a given contract. ACCOUNTING GUIDANCE ASC 606 guidance is secondary to other GAAP guidance. Accordingly, the fi rst requirement regarding uninstalled materials is to determine if it meets the requirement of classifi cation as inventory. If so, then inventory should be recorded and the item is treated as a contract cost only after customary inventory transfer accounting. If costs including uninstalled materials, wasted resources, or ineffi ciencies are not proportionate to progress in satisfying the performance obligation, an entity must carve out these costs if using a cost-to-cost input method. For example, a faithful depiction of performance might be to recognize zero profi t, if at contract inception, Contractor A expects all of the following conditions to be met: (ASC 606-10-55-21 (b)) • The equipment or materials are not distinct. • The customer is expected to obtain control of the equipment or materials signifi cantly before receiving services related to the materials or equipment. • The cost of the transferred equipment or materials is signifi cant to the total expected costs to completely satisfy the performance obligation. • Contractor A procures the equipment or materials from a third party and is not signifi cantly involved in designing and manufacturing the equipment (but Contractor A is acting as a principal). The condition in this example "at contract inception" is not intended to suggest that assessment of uninstalled materials should only be performed on facts that exist at contract inception. If the condition listed above exist at any time during the performance of the contract, the impact should be evaluated. The determination of whether the cost of uninstalled materials are signifi cant is a judgment. While there is no specifi c GAAP guidance, the construction industry accounting experts have suggested that 15% or more might be appropriate thresholds.

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