DOGE Impacts on Financial Reporting for Government Contractors

Summary: The creation of the Department of Government Efficiency (DOGE) in January 2025 has led to broad contract terminations across agencies and yielded over $205 billion in savings—$58 billion from contracts alone. These actions require careful evaluation under Accounting Standards Codification (ASC) 606 to determine whether revenue should be recognized, deferred, or reversed. Further, these efforts have caused significant operational changes, project disruptions, workforce reductions, and unpaid invoices. Organizations should review contracts for scope or pricing changes, assess if new goods or services are distinct and priced at Standalone Selling Price (SSP), apply ASC 606 consistently, and document conclusions.

Background

DOGE is terminating or reducing federal contracts as part of cost-cutting efforts. Some actions are outright terminations “for convenience” or default, while others are partial cancellations with no continued obligations. In certain cases, DOGE negotiates with contractors to continue operations on a reduced or modified scope, which may fall under ASC 606’s contract modification accounting.

Consider the following scenarios:

• If DOGE negotiates with a contractor to partially rescind or reduce scope but also allows continued performance under a modified set of deliverables, the arrangement changes the enforceable rights and obligations. In this situation, the action is treated as a contract modification rather than a pure termination. Under ASC 606, the contractor must evaluate how to account for the change. Options include treating it as a separate contract, a prospective adjustment, or a cumulative catch-up adjustment.
• DOGE may require agencies to amend existing contracts by removing certain tasks or funding lines while keeping others in place. This results in contractors operating under a revised, narrower scope. Such changes are considered a modification under ASC 606 if they revise or create new enforceable rights and obligations between the parties. These modifications are not terminations, as the contract continues to exist in a modified form.
• However, for it to qualify as a modification under ASC 606, you must show that the change was mutually agreed and enforceable, not purely a unilateral termination clause exercise, and that the change alters scope or price (or both) for the remaining performance obligations. If it’s purely the government exercising a unilateral termination right, then it’s not treated under the modification model but as a termination event under ASC 606.

If the action is a full unilateral termination, whether for convenience or default, it is not considered a contract modification. Instead, it must be treated strictly as a termination event.

Revenue recognition is limited to the extent of nonrefundable consideration received for goods or services already transferred or for allowable costs incurred plus any allowable profit if such amounts are contractually due and nonrefundable. In addition, claims can only be recorded if they are both probable and estimable, and any unrecoverable contract assets must be written off.

Below is the decision tree in the determination of whether the contract change should be accounted for under modification or termination:

1. Is it a full unilateral termination (for convenience or default)?

If Yes → Account as a Termination Event

Next steps if termination:

• Recognize costs plus allowable profit (to the extent of nonrefundable consideration received for goods or services already transferred, or for allowable costs and profit if such amounts are contractually due and non-refundable).
• Assess recoverability of claims.
• Write off contract assets if unrecoverable.

2. Is there a negotiated continuation with modified scope or price?

If Yes → Account as a Contract Modification under ASC 606

Next steps if modification:

• Apply modification model.
• Determine if separate contract, prospective adjustment, or cumulative catch-up.

Accounting of Contract Modifications

ASC 606 provides a framework for revenue recognition, requiring organizations to assess contract changes to ensure proper accounting and compliance. It outlines three distinct accounting treatments for contract modifications: separate contract, termination and replacement (prospective modification), and cumulative catch-up (retrospective modification).

Each treatment has unique implications for revenue recognition and financial reporting:

1. Separate Contract Accounting: A modification is treated as a separate contract if it adds distinct goods or services at standalone prices, with revenue recognized separately.
2. Prospective Accounting: If remaining goods or services are distinct but not at standalone rates, the original contract is replaced and revenue adjustment caused by the modification is recognized prospectively.
3. Retrospective Modification Accounting: When goods or services are not distinct, the contract is considered modified retrospectively, and revenue is adjusted using a cumulative catch-up approach.

Stand-Ready Obligations and Common Pitfalls

Additionally, ASC 606 addresses “stand-ready” obligations, which often arise in federal contracts where services are provided as needed at the government’s discretion, such as on-call technical support or system access. In these arrangements, each day of service is likely a distinct performance obligation, especially if the service qualifies as a stand-ready obligation. Therefore, upon contract modification, the remaining goods and services will also likely be distinct, and any modification to a stand-ready performance obligation will generally be accounted for prospectively.

Common mistakes include bundling distinct services as a single performance obligation or overlooking stand ready obligations, which can lead to incorrect revenue timing and compliance issues. To avoid these pitfalls, contractors should carefully review contract terms, document their rationale, and apply ASC 606 consistently.

Accounting of Contract Terminations

With the U.S. government abruptly ending several USAID-funded contracts in health, infrastructure, and education in 2025, the accounting impact is only now emerging. These terminations raise critical questions about whether previously recognized revenue should be retained, reversed, or deferred. Contractors must also evaluate how to treat prepayments and assess the status of partially fulfilled performance obligations. Together, these considerations demand careful and consistent application of ASC 606’s revenue recognition principles.

Under ASC 606, revenue is recognized when control of goods or services is transferred to the customer. If control has been transferred and payment is nonrefundable, revenue is recognized; otherwise, it must be recorded as a liability. This requires careful documentation and judgment, particularly for milestone-based or prepaid arrangements. The risk of revenue reversal is heightened, making rigorous application of ASC 606’s control-based framework essential.

Key Considerations for Contractors

Under ASC 606, when a contract is modified or cancelled, contractors must assess whether any amounts previously recognized as revenues should be reversed or deferred, particularly if refund obligations exist or if collectability of accounts receivable is in question.

If the customer has not accepted the deliverables or refund clauses apply, or there is uncertainty about payment (e.g., when the government may not pay), previously recognized revenue may need to be deferred or reclassified as a liability. This evaluation requires careful judgment, especially in cases of partial performance or prepayments or disputed receivables.

Contractors should also update disclosures to reflect the impact of the 2025 terminations. Specifically, the following areas should be evaluated:

• Refund Liabilities: Reclassify pre-funded amounts as liabilities if performance was incomplete or refunds are required.
• Collectability of Receivables: Assess whether outstanding accounts receivable are collectible and adjust revenue or recognize bad debt as appropriate.
• Disclosure Requirements: Update financial statement footnotes to reflect termination impacts and critical judgments.
• Contract Modifications vs. Terminations: Evaluate scope changes under ASC 606-10-25-12 to determine proper treatment.

Current Developments and Industry Response

As of September 2025, several SEC-listed contractors disclosed reassessing revenue recognized under USAID contracts due to widespread terminations and funding freezes. These disclosures have included restatements and revised guidance to reflect uncertainty around refunds and performance. Public company practices often influence how private companies interpret and apply accounting standards. The AICPA Government Contractors Revenue Recognition Task Force is expected to issue updated guidance later this year addressing termination scenarios and best practices.

These developments underscore the dynamic nature of revenue recognition under ASC 606, particularly in the context of government contract terminations. Transparent disclosures and timely reassessments are essential for maintaining stakeholder trust and audit readiness. As public and private contractors navigate these changes, remaining responsive and compliant with the latest standards and evolving guidance is critical.

Practical Steps for Compliance and Disclosure

To comply with ASC 606, contractors should review contracts for scope changes, assess distinct goods or services, and apply the standard consistently. Clear documentation and internal training help ensure uniform application, while ongoing communication with auditors supports early issue resolution.

Transparent disclosures are essential, especially regarding contract modifications and terminations, as seen with the 2025 USAID events. Timely updates to your accounting policies and disclosures help maintain compliance and stakeholder trust.

Final Thoughts: Navigating the Complexities of ASC 606

Successfully applying ASC 606 to government contract modifications and terminations requires careful judgment, consistent documentation, and transparent disclosures. The recent federal contract changes highlight the importance of staying current with evolving guidance and industry practices. Contractors must proactively assess revenue recognition, update policies, and communicate with stakeholders to maintain compliance and trust. By integrating these principles, organizations can effectively manage risk and adapt to a dynamic regulatory environment.