ASC 606, Revenue from Contracts with Customers, had an impact on the way many contractors recognized revenue related to contracts with the Federal Government. Redstone has covered this topic a couple of times (January 26, 2021 Government Contractor Challenges in 2021 Webinar and May 6, 2021 MossAdam/Redstone Webinar Compliance Changes for Government Contractors). ASC 606 also impacts the recognition of sales commissions. The overarching GAAP matching principle requires that the expense of sales be matched to the recognition of the related revenue.
So, What Was the Overall Impact of ASC 606?
Not that much when it comes to dealing with Cost Plus Fixed Fee (CPFF) and Time & Material (T&M) contracts. Incentive type contracts (both cost and fixed) required an estimate of the incentive (or award) fee over the life of the contract. The total impact of any anticipated losses must be recorded when the loss is determined. The biggest impact of ASC 606 is on fixed priced contracts, which now requires an in-depth analysis as to when to recognize revenue.
Recognition of Sales Commissions
While sales commissions are not an overwhelming cost for most contractors, many do incur selling expenses in the form of distributor fees, sales agent fees, and of course, the Government mandated GSA Industrial Funding Fee (IFF). (We pontificate a little about the IFF below.) Many selling arrangements require the contractor to pay the sales commission when the related contract is awarded, not when the revenue is recognized. In this instance, ASC 606 requires the contractor to record a deferred expense, which should be recognized as the revenue is recognized. This deferred expense is shown on the balance sheet as an asset or a contra liability until the expense (and related revenue) is fully recognized.
GSA Industrial Funding Fee
We often get the question from contractors regarding the proper government contract accounting treatment for GSA IFF. While some others in the GOVCON community have bowed down to the DCAA pressure to consider IFF to be a contra-revenue or even an unallowable expense, we continue to believe the GSA IFF expenses needs to be appropriately treated as an allowable selling expense, for more information click here. The quarterly payment to GSA for the IFF represents an allowable selling expense under an established agreement with a selling agency (i.e., GSA) maintained by the contractor for the purpose of securing business. Unless we are mistaken as to what GSA (a Government Agency) does, the payment of IFF does not include any advertising or corporate image enhancement which would be unallowable under FAR 31.205-1. It is clear to us that a similar fee paid to a non-federal agency (e.g., authorized distributor) would be an allowable selling expense. Therefore, the fact that the payment is made to GSA should have no impact on the categorization of the expense whatsoever. We recognize that many contractors would rather treat this as contra-revenue or unallowable, just to avoid conflict with a DCAA auditor, as the amount is often immaterial, however, technically, there is no regulatory basis for DCAA’s insistence on IFF being treated as such. OK, we will get off our soap box now.
Redstone GCI assists contractors, throughout the U.S. and internationally, with understanding cost accounting and regulations in the GOVCON environment.