Contract liability
A contract liability is an entity's obligation to transfer goods or services to a customer for which it has received consideration, or for which consideration is unconditionally due. In SaaS it is usually presented as deferred revenue, and it unwinds into revenue as the related performance obligation is satisfied.
Standard references
- ASC 606606-10-45-2
- IFRS 15paragraph 106
- Ind AS 115paragraph 106
Worked example
Illustrative: a $24,000 annual subscription starting 1 January is invoiced and paid on 1 January.
- 1 January: Dr Cash $24,000 / Cr Contract liability $24,000.
- Each month-end: Dr Contract liability $2,000 / Cr Revenue $2,000.
- 31 March: contract liability balance = $24,000 − 3 × $2,000 = $18,000.
Result: The liability reduces to $0 by 31 December as the subscription is delivered.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Recording a liability and receivable for an advance invoice on a cancellable contract, where no unconditional right to payment exists yet.
- Netting contract liabilities against contract assets of a different contract.
- Presenting a multi-year prepayment entirely as current.