Contract asset
A contract asset is an entity's right to consideration in exchange for goods or services already transferred to the customer, when that right is conditioned on something other than the passage of time, typically the entity's future performance. When the right becomes unconditional, the amount is reclassified to a receivable.
Standard references
- ASC 606606-10-45-1 and 45-3
- IFRS 15paragraphs 105 and 107
- Ind AS 115paragraphs 105 and 107
Worked example
Illustrative: a $50,000 fixed-fee build of two modules, each allocated $25,000. The customer can be invoiced only after both modules are delivered.
- Month 3, module A delivered: Dr Contract asset $25,000 / Cr Revenue $25,000. Payment is still conditional on delivering module B.
- Month 5, module B delivered and $50,000 invoiced: Dr Receivable $50,000 / Cr Contract asset $25,000 / Cr Revenue $25,000.
Result: The contract asset exists only between the two deliveries and is cleared when the right to payment becomes unconditional.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Labelling a conditional right as an unbilled receivable.
- Netting contract assets and contract liabilities across different contracts; netting is done at contract level.
- Not assessing contract assets for credit losses or impairment.