Cover Page
Title Page

Preface

(Updated as of July 1, 2017)

About AICPA Audit and Accounting Guides

This AICPA Audit and Accounting Guide has been developed by the AICPA Construction Contractors Guide Committee to assist management in the preparation of their financial statements in conformity with U.S. generally accepted accounting principles (GAAP) and to assist practitioners in performing and reporting on their audit engagements.

AICPA Guides may include certain content presented as “Supplement,” “Appendix,” or “Exhibit.” A supplement is a reproduction, in whole or in part, of authoritative guidance originally issued by a standard setting body (including regulatory bodies) and applicable to entities or engagements within the purview of that standard setter, independent of the authoritative status of the applicable AICPA Guide. Both appendixes and exhibits are included for informational purposes and have no authoritative status.

The Financial Reporting Executive Committee (FinREC) is the designated senior committee of the AICPA authorized to speak for the AICPA in the areas of financial accounting and reporting. Conforming changes made to the financial accounting and reporting guidance contained in this guide are approved by the FinREC Chair (or his or her designee). Updates made to the financial accounting and reporting guidance in this guide exceeding that of conforming changes are approved by the affirmative vote of at least two-thirds of the members of FinREC.

This guide does the following:

Accounting guidance for nongovernmental entities included in an AICPA Guide is a source of nonauthoritative accounting guidance. As discussed later in this preface, FASB ASC is the authoritative source of U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission (SEC).

An AICPA Guide containing auditing guidance related to generally accepted auditing standards (GAAS) is recognized as an interpretive publication as defined in AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards (AICPA, Professional Standards). Interpretive publications are recommendations on the application of GAAS in specific circumstances, including engagements for entities in specialized industries.

Interpretive publications are issued under the authority of the AICPA Auditing Standards Board (ASB) after all ASB members have been provided an opportunity to consider and comment on whether the proposed interpretive publication is consistent with GAAS. The members of the ASB have found the auditing guidance in this guide to be consistent with existing GAAS.

Although interpretive publications are not auditing standards, AU-C section 200 requires the auditor to consider applicable interpretive publications in planning and performing the audit because interpretive publications are relevant to the proper application of GAAS in specific circumstances. If the auditor does not apply the auditing guidance in an applicable interpretive publication, the auditor should document how the requirements of GAAS were complied with in the circumstances addressed by such auditing guidance.

The ASB is the designated senior committee of the AICPA authorized to speak for the AICPA on all matters related to auditing. Conforming changes made to the auditing guidance contained in this guide are approved by the ASB Chair (or his or her designee) and the Director of the AICPA Audit and Attest Standards Staff. Updates made to the auditing guidance in this guide exceeding that of conforming changes are issued after all ASB members have been provided an opportunity to consider and comment on whether the guide is consistent with the Statements on Auditing Standards (SASs).

Any auditing guidance in a guide appendix or exhibit (whether a chapter or back matter appendix or exhibit), though not authoritative, is considered an “other auditing publication.” In applying such guidance, the auditor should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the audit. Although the auditor determines the relevance of other auditing guidance, auditing guidance in a guide appendix or exhibit has been reviewed by the AICPA Audit and Attest Standards staff and the auditor may presume that it is appropriate.

Purpose and Applicability

Limitations

This guide does not discuss the application of all GAAP or GAAS that are relevant to the preparation and audit of financial statements of construction contractors. This guide is directed primarily to those aspects of the preparation and audit of financial statements that are unique to construction contractors or those aspects that are considered particularly significant to them.

Recognition

2017 Guide Edition

AICPA Senior Committees

Auditing Standards Board

Catherine Schweigel, ASB Member
Mike Santay, Chair

Financial Reporting Executive Committee

Dan Noll, AICPA Director of Accounting Standards
Jim Dolinar, Chair


The AICPA gratefully acknowledges those who reviewed and otherwise contributed to the development of this guide: Adam Canosa, Tina Catalina, William A. Clark, Jr., Robert S. Mercado, James Miller, Joseph Naterelli, Suesan Patton, Chris Roemersma, and Robert Schroell.

AICPA Staff

Dave Arman
Technical Manager
Accounting and Auditing Content Development

Guidance Considered in This Edition

This edition of the guide has been modified by the AICPA staff to include certain changes necessary due to the issuance of authoritative guidance since the guide was originally issued, and other revisions as deemed appropriate. Relevant guidance issued through July 1, 2017 has been considered in the development of this edition of the guide. However, this guide does not include all audit, accounting, reporting, regulatory, and other requirements applicable to an entity or a particular engagement. This guide is intended to be used in conjunction with all applicable sources of relevant guidance.

Relevant guidance that is issued and effective on or before July 2017 is incorporated directly in the text of this guide. Relevant guidance issued but not yet effective as of July 1, 2017 but becoming effective on or before December 31, 2017 is also presented directly in the text of the guide, but shaded gray and accompanied by a footnote indicating the effective date of the new guidance. The distinct presentation of this content is intended to aid the reader in differentiating content that may not be effective for the reader’s purposes (as part of the guide’s “dual guidance” treatment of applicable new guidance).

Relevant guidance issued but not yet effective as of the date of the guide and not becoming effective until after December 31, 2017 is referenced in a “guidance update” box; that is, a box that contains summary information on the guidance issued but not yet effective.

In updating this guide, all guidance issued up to and including the following was considered, but not necessarily incorporated, as determined based on applicability:

Users of this guide should consider guidance issued subsequent to those items listed previously to determine their effect, if any, on entities and engagements covered by this guide. In determining the applicability of recently issued guidance, its effective date should also be considered.

The changes made to this edition of the guide are identified in the “Schedule of Changes” appendix. The changes do not include all those that might be considered necessary if the guide were subjected to a comprehensive review and revision.

FASB standards quoted are from the FASB Accounting Standards Codification © 2015, Financial Accounting Foundation. All rights reserved. Used by permission.

FASB ASC Pending Content

Presentation of Pending Content in FASB ASC

Amendments to FASB ASC (issued in the form of ASUs) are initially incorporated into FASB ASC in "pending content" boxes following the paragraphs being amended with links to the transition information. The pending content boxes are meant to provide users with information about how the guidance in a paragraph will change as a result of the new guidance.

Pending content applies to different entities at different times due to varying fiscal year-ends, and because certain guidance may be effective on different dates for public and nonpublic entities. As such, FASB maintains amended guidance in pending content boxes within FASB ASC until the roll-off date. Generally, the roll-off date is six months following the latest fiscal year end for which the original guidance being amended could still be applied.

Presentation of FASB ASC Pending Content in AICPA Guides

Amended FASB ASC guidance that is included in pending content boxes in FASB ASC on July 1, 2017, is referenced as "Pending Content" in this guide. Readers should be aware that "Pending Content" referenced in this guide will eventually be subjected to FASB’s roll-off process and no longer be labeled as "Pending Content" in FASB ASC (as discussed in the previous paragraph).

Terms Used to Define Professional Requirements in This AICPA Audit and Accounting Guide

Any requirements described in this guide are normally referenced to the applicable standards or regulations from which they are derived. Generally, the terms used in this guide describing the professional requirements of the referenced standard setter (for example, the ASB) are the same as those used in the applicable standards or regulations (for example, “must” or “should”). However, where the accounting requirements are derived from FASB ASC, this guide uses “should,” whereas FASB uses “shall.” In its resource document “About the Codification” that accompanies FASB ASC, FASB states that it considers the terms “should” and “shall” to be comparable terms and to represent the same concept—the requirement to apply a standard.

Readers should refer to the applicable standards and regulations for more information on the requirements imposed by the use of the various terms used to define professional requirements in the context of the standards and regulations in which they appear.

Certain exceptions apply to these general rules, particularly in those circumstances where the guide describes prevailing and/or preferred industry practices for the application of a standard or regulation. In these circumstances, the applicable senior committee responsible for reviewing the guide’s content believes the guidance contained herein is appropriate for the circumstances.

Applicability of Generally Accepted Auditing Standards and PCAOB Standards

Appendix A, “Council Resolution Designating Bodies to Promulgate Technical Standards,” of the AICPA Code of Professional Conduct recognizes both the ASB and the PCAOB as standard setting bodies designated to promulgate auditing, attestation, and quality control standards. Paragraph .01 of the “Compliance With Standards Rule” (AICPA, Professional Standards, ET sec. 1.310.001 and 2.310.001) requires an AICPA member who performs an audit to comply with the applicable standards.

Audits of the financial statements of those entities subject to the oversight authority of the PCAOB (that is, those audit reports within the PCAOB’s jurisdiction as defined by the Sarbanes-Oxley Act of 2002, as amended) are to be conducted in accordance with standards established by the PCAOB, a private sector, nonprofit corporation created by the Sarbanes-Oxley Act of 2002. The SEC has oversight authority over the PCAOB, including the approval of its rules, standards, and budget. In citing the auditing standards of the PCAOB, references generally use section numbers within the reorganized PCAOB auditing standards and not the original standard number, as appropriate.

Audits of the financial statements of those entities subject to the oversight authority of the PCAOB (that is, those audit reports not within the PCAOB’s jurisdiction as defined by the Act, as amended)—hereinafter referred to as nonissuers1—are to be conducted in accordance with GAAS as issued by the ASB. The ASB develops and issues standards in the form of SASs through a due process that includes deliberation in meetings open to the public, public exposure of proposed SASs, and a formal vote. The SASs and their related interpretations are codified in the AICPA’s Professional Standards. In citing GAAS and their related interpretations, references generally use section numbers within the codification of currently effective SASs and not the original statement number, as appropriate.

The auditing content in this guide primarily discusses GAAS issued by the ASB and is applicable to audits of nonissuers. Users of this guide may find the tool developed by the PCAOB’s Office of the Chief Auditor helpful in identifying comparable PCAOB Standards. The tool is available at https://pcaobus.org/Standards/Auditing/Pages/FindAnalogousStandards.aspx.

Applicability of Quality Control Standards

QC section 10, A Firm’s System of Quality Control (AICPA, Professional Standards), addresses a CPA firm’s responsibilities for its system of quality control for its accounting and auditing practice. A system of quality control consists of policies that a firm establishes and maintains to provide it with reasonable assurance that the firm and its personnel comply with professional standards, as well as applicable legal and regulatory requirements. The policies also provide the firm with reasonable assurance that reports issued by the firm are appropriate in the circumstances.

QC section 10 applies to all CPA firms with respect to engagements in their accounting and auditing practice. In paragraph .13 of QC section 10, an accounting and auditing practice is defined as “a practice that performs engagements covered by this section, which are audit, attestation, compilation, review, and any other services for which standards have been promulgated by the ASB or the AICPA Accounting and Review Services Committee (ARSC) under the “General Standards Rule” (ET sec.1.300.001) or the “Compliance With Standards Rule” (ET sec. 1.310.001) of the AICPA Code of Professional Conduct. Although standards for other engagements may be promulgated by other AICPA technical committees, engagements performed in accordance with those standards are not encompassed in the definition of an accounting and auditing practice.”

In addition to the provisions of QC section 10, readers should be aware of other sections within AICPA Professional Standards that address quality control considerations, including the following provisions that address engagement level quality control matters for various types of engagements that an accounting and auditing practice might perform:

Because of the importance of engagement quality, this guide includes an appendix, “Overview of Statements on Quality Control Standards.” This appendix summarizes key aspects of the quality control standard. This summarization should be read in conjunction with QC section 10, AU-C section 220, AT-C section 105, AR-C section 60, and the quality control standards issued by the PCAOB, as applicable.

Alternatives Within GAAP

The Private Company Council (PCC), established by the Financial Accounting Foundation’s Board of Trustees in 2012, and FASB, working jointly, will mutually agree on a set of criteria to decide whether and when alternatives within U.S. GAAP are warranted for private companies. Based on those criteria, the PCC reviews and proposes alternatives within U.S. GAAP to address the needs of users of private company financial statements. These U.S. GAAP alternatives may be applied to those entities that are not public business entities, not-for-profits, or employee benefit plans.

The FASB ASC Master Glossary defines a public business entity as:

A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.

a.  It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).

b.  It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.

c.  It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.

d.  It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.

e.  It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

Considerations related to alternatives for private companies may be discussed within this guide’s chapter text. When such discussion is provided, the related paragraphs are designated with the following title: “Considerations for Private Companies That Elect to Use Standards as Issued by the Private Company Council.”

AICPA.org Website

The AICPA encourages you to visit the website at www.aicpa.org, and the Financial Reporting Center (FRC) at www.aicpa.org/FRC. The FRC supports members in the execution of high-quality financial reporting. Whether you are a financial statement preparer or a member in public practice, this center provides exclusive member-only resources for the entire financial reporting process and provides timely and relevant news, guidance, and examples supporting the financial reporting process, including accounting, preparing financial statements and performing compilation, review, audit, attest or assurance, and advisory engagements. Certain content on the AICPA’s websites referenced in this guide may be restricted to AICPA members only.

Select Recent Developments Significant to This Guide

Attestation Clarity Project

To address concerns over the clarity, length, and complexity of its standards, the ASB established clarity drafting conventions and undertook a project to redraft all the standards it issues in clarity format. The redrafting of Statements on Standards for Attestation Engagements (SSAEs or attestation standards) in SSAE No. 18, Attestation Standards: Clarification and Recodification, represents the culmination of that process.

The attestation standards are developed and issued in the form of SSAEs and are codified into sections. SSAE No. 18 recodifies the “AT” section numbers designated by SSAE Nos. 10–17 using the identifier “AT-C” to differentiate the sections of the clarified attestation standards (“AT-C sections”) from the attestation standards that are superseded by SSAE No. 18 (“AT sections”).

The AT sections in AICPA Professional Standards remain effective through April 2017, by which time substantially all engagements for which the AT sections were still effective are expected to be completed. The clarified attestations found in AT-C sections are effective for practitioners' reports dated on or after May 1, 2017.

Note

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TABLE OF CONTENTS

Chapter 1
Industry Background

1.01 This chapter is intended as background for the presentation of recommendations and guidance on financial reporting and auditing in the industry. It does not contain recommendations or guidance on the technical application of generally accepted accounting or auditing standards. Recommendations and guidance on technical accounting and auditing issues are presented in the chapters that follow and include the guidance from FASB Accounting Standards Codification (ASC) 605-35.

Nature and Significance of the Industry

1.02 The construction industry consists of individuals and entities that are engaged in diverse types of activities defined as construction in the North American Industry Classification System (NAICS). The 2017 U.S. NAICS Manual North American Industry Classification System—United States classifies construction establishments into a wide variety of subcategories. These subcategories include: Construction of Buildings (residential and nonresidential), Heavy and Civil Engineering Construction (including Utility System Construction, Land Subdivision, and Highway, Street and Bridge Contractors), and several different classes of Specialty Trade Contractors (such as Foundation, Structure, and Building Exterior Contractors, Building Equipment Contactors, Building Finishing Contractors, and Other Specialty Trade Contractors). Data from the Bureau of Economic Analysis indicates that the construction industry is a significant factor in the U.S. economy, contributing nearly 4 percent of the gross domestic product in 2015. It represents hundreds of billions of dollars of economic activity, consists of several hundred thousand business entities widely dispersed throughout the country, and employs a large labor force.

1.03 Construction contractors may be distinguished by their size, the type of construction activity they undertake, and the nature and scope of their responsibility for a construction project. Although the construction industry also encompasses large, multinational contractors that undertake construction of billion-dollar projects, most business entities in the industry are small, local businesses whose activities are limited to a small geographical area. The large number of small entities in the industry may be attributed to the ease of entry into many phases of the construction industry and to the limited amount of capital required. The diverse types of business activities conducted by construction contractors include construction of buildings, highways, dams, and bridges; installation of machinery and equipment; dredging; and demolition. Many entities are able to meet the demands of large construction projects by combining their efforts in joint ventures.

1.04 A contractor may engage in those activities as a general contractor, a subcontractor, or a construction manager. A general contractor is a prime contractor who enters into a contract with the owner of a project for the construction of the project and who takes full responsibility for its completion, although he or she may enter into subcontracts with others for the performance of specific parts or phases of the project. A subcontractor is a second-level contractor who enters into a contract with a prime contractor or an upper-tier contractor to perform a specific part or phase of a construction project. A subcontractor’s performance responsibility is to the general contractor, with whom the subcontractor’s relationship is essentially the same as that of the prime contractor to the owner of the project. A construction manager is a contractor who enters into an agency contract with an owner of a construction project to supervise and coordinate the construction activity on the project, including negotiating contracts with others for all the construction work.

1.05 The organizational structure, resources, and capabilities of contractors tend to vary with the type of activity. Each type of contractor can pose unique accounting and auditing problems.