Contract Assets And Contract Liabilities – FAQ | IFRS

Contract assets and contract liabilities

This part relates to a complete explanation of IFRS 15 Revenue from contracts with customers in respect of Engineering & Construction contracts, see Revenue from Engineering & Construction contracts.


IAS 11 required entities to record assets for unbilled accounts receivable when revenue is recognised but not billed. Once the invoice is submitted to the customer, the unbilled receivable is reclassified as a billed accounts receivable.

Similarly, billings in excess of costs are generally recognised as liabilities. IFRS 15 is based on the notion that a contract asset or contract liability is generated when either party to a contract performs. An entity is required to present these contract assets or contract liabilities in the statement of financial position. Under IFRS 15, entities are not required to use the terms ’contract asset‘ or ’contract liability‘, but must disclose sufficient information so that users of the financial statements can clearly distinguish between an unconditional right to consideration (a receivable) and a conditional right to receive consideration (a contract asset).

Under the standard, when an entity satisfies a performance obligation by delivering the promised good or service, the entity has earned a right to consideration from the customer and, therefore, has a contract asset. Once the entity has an unconditional right to receive the consideration from the customer, the right represents a receivable from the customer that would be classified separately from contract assets. This occurs when there are no further performance obligations required to be satisfied before the entity has the right to collect the customer’s consideration. A right is unconditional if nothing other than the passage of time is required before payment of that consideration is due. Contract assets and contract liabilities

Therefore, unlike the requirements in IAS 11, the timing of the reclassification of a balance from a contract asset to an accounts receivable balance may differ from the timing of the invoicing of the receivable. For example, a contractor could record a receivable (rather than a contract asset) for revenue related to construction completed to date prior to submitting a progress bill in accordance with the billing schedule in the contract. Contract assets and contract liabilities

When the customer performs first — for example, by prepaying its promised consideration — the entity has a contract liability. This is consistent with today’s requirements for billings in excess of costs in IAS 11. Contract assets and contract liabilities

Receivables and contract assets are subject to an impairment assessment in accordance with IFRS 9 or IAS 39. In addition, if upon initial measurement, there is a difference between the measurement of the receivable under IFRS 9 or IAS 39 and the corresponding amount of revenue, that difference will be presented as an expense (e.g., as an impairment loss). Impairment losses resulting from contracts with customers are presented separately from losses on other contracts.

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