Items fall into the unbilled-A/R category if the customer has not paid any consideration, but the right to reimbursement is unconditional and depends only on the passage of time. The right to reimbursement depends on something other than the passage of time, such as satisfactorily meeting performance standards. 1 A contract asset is an item (either a good or service) for which a customer has not yet provided any consideration. Under the updated guidelines, companies must reclassify much inventory held on balance sheets into one of two new categories that were previously less relevant: unbilled accounts receivable (A/R) and contract assets. But a new revenue-recognition framework, Accounting Standards Codification (ASC) 606, has complicated their strategy. A disciplined approach, they reasoned, could quickly generate enough cash to satisfy their obligations and provide a cushion against tough economic times. Traditionally, defense companies have tried to optimize working capital through strong inventory management. Adding to the attention, the COVID-19 pandemic has prompted governments, investors, CEOs, and others to take a closer look at the working capital of any potential contract partners, since this can serve as a proxy for their resilience. These ventures, requiring vast amounts of cash, have recently put working capital in the spotlight. With competition growing, defense companies have been increasing R&D investments, boosting capital expenditures, and aggressively pursuing inorganic growth through M&A.
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