Engineering & Construction Spotlight — Considerations Related to Materials Purchased for Over-Time Contracts in DISE Disclosures (November 12, 2025)

These examples are in the context of an arrangement for the creation or enhancement of an asset that the customer controls; however, similar concepts may apply to other arrangements for which revenue is recognized over time, such as an arrangement for the sale of a customized good (i.e., the goods have no alternative use to the entity and the entity has a right to payment for performance to date).

In some cases, an entity may need to use judgment in determining whether materials purchased are within the scope of ASC 330 — for example, when material is purchased in accordance with a customer contract, but because of the nature of the promise with the customer, the material purchased is deployed directly to a customer contract (sometimes immediately) and forms part of the good that is being transferred to the customer over time. In such cases, the material may never be capitalized as inventory and an entity would be required to use judgment in determining whether the costs that were directly expensed (because the material formed part of a customer-controlled asset) were capitalizable in accordance with ASC 330. Examples of such contracts include construction or production contracts that may have been accounted for entirely in accordance with ASC 605-35 (formerly SOP 81-1) before the adoption of ASC 606.

Paragraph BC76 of ASU 2024-03 clarifies that some costs, such as costs “accumulated for long-term construction contracts, may be colloquially referred to as ‘inventory’ by an entity even though they are not considered inventory under Topic 330. Costs related to assets that are not recognized as inventory under Topic 330 should not be included in the purchases of inventory category.” Therefore, while the costs of materials purchased to fulfill performance obligations that required an entity to transfer a good to a customer over time are often referred to as “inventory,” companies will need to determine whether these costs constitute purchases of inventory that are within the scope of ASC 330.

ASC 606 and ASC 340-40 superseded substantially all of ASC 605-35, including its cost guidance. The adoption of ASC 606 and ASC 340-40 by construction entities may not have resulted in a change in accounting for contracts that had been accounted for entirely within the scope of ASC 605-35 and constituted an obligation to create or enhance an asset that is controlled by the customer. Under ASC 605-35 or upon adoption of ASC 606, these construction entities may not have considered material purchases for these contracts to be within the scope of ASC 330. Rather, such entities may have considered the material cost to be directly related to an obligation to fulfill a customer contract and not to be within the scope of other GAAP; therefore, in such circumstances, the costs may be accounted for as costs of fulfilling a contract with a customer and may be within the scope of ASC 340-40. Previously, whether these costs were determined to be within the scope of ASC 330 or other GAAP may have not been important since such a distinction would typically not have a material impact on an entity’s balance sheet, income statement, or disclosures. However, the need to distinguish material costs as either inventory costs or fulfillment costs not subject to ASC 330 is relevant to the DISE disclosure requirements.

ASU 2024-03 did not supersede or otherwise amend the definitions, scope, or recognition and measurement guidance in ASC 330. Inventory, as defined in ASC 330, generally consists of tangible goods held for sale in the ordinary course of business or materials to be consumed in the production of goods for sale. In contrast, some material purchases for a customer contract may never be an entity’s inventory, for example, when the material is purchased and integrated into an asset that the customer controls. In these instances, the costs may be considered fulfillment costs outside the scope of ASC 330. Fulfillment costs are those that are not within the scope of other U.S. GAAP and are incurred in connection with an entity’s obligation to satisfy a performance obligation to a customer.

Although ASC 606 and ASC 340-40 superseded much of the cost guidance in ASC 605-35, we believe that some of the concepts from this guidance are still relevant and may be useful in the determination of whether costs are within the scope of ASC 330. Specifically, we believe that how an asset is subsequently measured (e.g., under an impairment model) could be relevant when an entity is distinguishing between purchases of materials that are within the scope of ASC 330 and those within the scope of other GAAP (e.g., ASC 340-40). Inventory is generally measured at the lower of cost or market, or the net realizable value from the subsequent sale of the inventory, which takes into account sales in multiple contracts and with multiple customers. In contrast, an asset capitalized in accordance with ASC 340-40 as a fulfillment cost is assessed for recoverability by reference to the remaining consideration an entity expects to receive from a particular customer contract (or renewals of such a contract in certain circumstances).

For costs that are recognized on the balance sheet, an entity should maintain existing accounting policies that distinguish between inventory and fulfillment costs. However, entities may not have needed to establish policies to distinguish between the scope of costs that were capitalized and allocated to a customer contract in the same period and the scope of costs that were immediately allocated and directly expensed to a customer contract. An entity will need to use judgment in making this scope determination for the DISE disclosures.

Generally, it is acceptable to classify materials purchased as purchases of inventory; however, there may be factors indicating that the materials purchased might reasonably be considered outside the scope of ASC 330 and therefore would not be classified as purchases of inventory. Construction entities should follow their existing accounting policies in making this determination. In addition, the following indicators may be helpful in forming judgments on whether purchased materials represent costs that are not within the scope of ASC 330 (i.e., other fulfillment costs).

• Materials are ordered for a specific contract.
• Materials are purchased and allocated to a specific contract.
• Direct materials purchased are assigned to a customer contract and factored into the entity’s measure of progress for revenue recognition.
• The materials do not have an alternative use (i.e., they are used only to fulfill a specific contract with the customer).
• Capitalized costs are subject to a recoverability assessment based only on the consideration expected to be received from a contract with a customer.
• Costs are either (1) capitalized as fulfillment costs because they enhance a resource that will be used to satisfy a future performance obligation or (2) expensed because materials are immediately used to satisfy or partially satisfy a performance obligation.

Once an entity determines the classification for a particular type of cost (e.g., inventory versus fulfillment costs), it should consistently apply this classification to similar facts, contracts, and circumstances. To help users understand its approach, an entity should also consider providing or enhancing disclosures regarding its accounting policies, including clear descriptions of which contract types or costs are treated as inventory costs and which are treated as noninventory costs.

An entity’s rationale for determining the scope of material purchases and related presentation within the DISE disclosures should be reasonable and supportable and should be applied consistently to similar types of costs and contract terms.

 

Connecting the Dots

ASU 2024-03 did not supersede or otherwise amend the definitions, scope, or recognition and measurement guidance in other GAAP standards. In paragraphs BC100–BC102 of the ASU, the FASB acknowledges diversity in practice in the classification of certain costs for which the current guidance may not prescribe the presentation. In those instances, an entity should present such costs in a manner consistent with its current accounting policies and with how it presents similar costs.

Upon adoption of ASU 2024-03, it could be acceptable for an entity to conclude that with respect to the cost of materials purchased to fulfill contracts for which revenue is recognized over time, such costs are within the scope of ASC 330 and therefore are presented within the “purchases of inventory” category. Proponents of this view believe that although the costs may be immediately expensed because they result in a component of a customer-controlled asset, the material would otherwise have been capitalizable as inventory. Alternatively, a construction entity might conclude that materials purchased to fulfill contracts for which revenue is recognized over time are not within the scope of ASC 330. Proponents of this view believe that, in such cases, material purchases have not met (and would not meet) the definition of inventory since the material is transferred directly to the customer as part of a customer-controlled asset. We believe that either approach may be appropriate depending on the facts and circumstances.

Depending on the entity’s scope-related conclusions, there are several potential disclosure outcomes, including the following:

• Certain material purchases are fulfillment costs outside the scope of ASC 330 (e.g., those expensed to a customer contract), and other material purchases are inventory within the scope of ASC 330 (e.g., those that are capitalized to inventory and remain in inventory at period end); therefore, fulfillment costs are presented outside “purchases of inventory” (e.g., as “other” or in a separate category) and costs recognized as inventory are presented within “purchases of inventory.”
• All materials purchased to fulfill an over-time contract are inventory within the scope of ASC 330; therefore, all costs are presented as “purchases of inventory” regardless of whether they are expensed as a fulfillment cost or recognized as inventory.
• All materials purchased to fulfill an over-time contract are fulfillment costs outside the scope of ASC 330; therefore, all costs are presented outside “purchases of inventory” as “other” or as a separate category regardless of whether they are expensed as a fulfillment cost or recognized as inventory.