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Page | 34 IMPLEMENTATION EXAMPLE 2: BUILDING CONSTRUCTION Uninstalled Materials (continued) > Alternative Presentation of Scenario B If the contractor determines that control of the uninstalled materials has not been transferred to the customer, the uninstalled materials should be classifi ed as inventory and not recorded as job costs. The wasted costs would be excluded from costs to date for purposes of measuring performance. Under this scenario performance would be 25% ($20,000 over $80,000). Job costs deducted would be $30,000. Revenue recognized $25,000 ($100,000 x 25%). Gross profi t recognized job to date would be a $5,000 loss. Practical Application Note: ASC 606 does not change the way inventory has or will be accounted for. ASC 606 uses a standard of transfer of control where in the past it was transfer of risk and reward as to when an item ceased to be inventory. Across the US, the legal rights of owners are diff erent by jurisdiction and in some cases as little as creating a lien right against the property creates a transfer of control under ASC 606. This could happen long before the item is transferred to the job site or alternative site. Similarly, some jurisdictions require the material to be billed to the customer. This is a fact that has to be evaluated based upon the conditions of each company. If the contractor determines that control of the uninstalled materials has been transferred to the customer, the uninstalled materials would be carved out of estimated costs and transaction price. Performance of other costs would be 28.6% ($20,000 over the $70,000 estimated costs ($90,000 total estimated costs minus $10,000 uninstalled materials and wasted costs)). The performance to date of 28.6% would be applied to the remaining transaction price of $90,000 recognizing $25,740 earned to date plus $10,000 zero profi t recognition for the uninstalled materials. Note that the revenue recognized to date is $35,740 following the uninstalled material guidance costs to date $40,000, and recognized loss to date $4,260. Therefore, revenue could potentially be the following: $25,000 – Control not transferred and materials reported as inventory. $35,740 – Control transferred and uninstalled materials signifi cant to cost incurred to date. $37,500 – Control transferred and uninstalled materials not signifi cant to costs incurred to date. The following example is applicable when the cost-to-cost percentage of completion method is used. This might be a factor to consider when companies are evaluating their methodology in adopting ASC 606 – using an output method would totally eliminate the complexity around materials other than whether the material is inventory or job cost. Example: A Company specializes in building manufacturing facilities in which the contract includes signifi cant specialized/customized equipment as part of building the facility in which equipment control is transferred to the customer upon delivery and not installation, which is signifi cantly later than delivery. Under this scenario, the transaction price would be reduced by the cost of equipment and revenue would be recognized only up to costs incurred when the equipment is delivered to the customer. Additionally, the contractor should assess whether the customized equipment is a separate performance obligation.

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