Contract asset

Contract assets are defined as an entity’s right to consideration in exchange for goods or services  (i.e. conditional) that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance). An entity shall assess a contract asset for impairment in accordance with IFRS 9. An impairment of a contract asset shall be measured, presented and disclosed on the same basis as a financial asset that is within the scope of IFRS 9.

A receivable is an entity’s right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due. An entity shall account for a receivable in accordance with IFRS 9. Upon initial recognition of a receivable from a contract with a customer, any difference between the measurement of the receivable in accordance with IFRS 9 and the corresponding amount of revenue recognised shall be presented as an expense (for example, as an impairment loss).

IFRS 15 introduced contract assets and contract liabilities as new concepts, though an entity may use different terms in its financial statements. A contract asset is recognised when an entity has satisfied a performance obligation, but cannot recognise a receivable until fulfilling other obligations. While a contract asset is conditioned on further performance, a receivable is an unconditional right to payment, and both contract assets and receivables are tested for impairment. When presenting contract assets and receivables a company will net contract assets and liabilities on a contract level, but should present them separately in aggregate.

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Contract asset

 

Generally, contract assets and contract liabilities are based on past performance. The key to determining which to recognise is ascertaining which party acted first. For example, when a customer prepays, the receiving entity records a contract liability—an obligation that must be fulfilled to “earn” the prepaid consideration. Once the entity performs by transferring goods or services to the customer, the entity can then recognise revenue and adjust the liability downward (ultimately to zero). The proper accounting for a contract liability is very similar to treatment for deferred or unearned revenue.

It should be noted, however, that there is a general resistance to “grossing up” the balance sheet. If a payment is due and has not been made, a company will likely consider other factors in determining whether recognising the receivable is appropriate (e.g., concerns about the relationship with the customer, enforce-ability of the arrangement, or collectability of the enforcement).

Example: Contract asset and trade receivable in a telecommunications company

A telecommunications company enters into a contract with a customer who purchases a smartphone and a 24-month voice plan. The customer must pay $100 for the smartphone in 30 days and $30 per month for the voice plan during next 24 months. Therefore, total transaction price in the contract amounts to $820 ($100 + 24 x $30). Telecommunications company considers the smartphone and voice plan to be separate performance obligations. $340 is allocated to the smartphone and the remaining $480 to the voice plan. When the contract is signed and the smartphone provided to the customer, the telecommunications company records the following entries:

Trade receivable

100

Contract asset

240

Revenue

340

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As we can see, $340 of revenue is recognised when the smartphone is provided to the customer (this is the transaction price allocated to this performance obligation, which does not need to be the same as the price stated in the contract). However, only $100 is unconditionally due (to be paid within 30 days), and the remaining $240 is conditional on the voice plan provided by the company in the future (the customer won’t have to pay if the company stops providing telecommunications services).  Thus, $240 is recognised as a contract asset.

When the invoice for $30 for the first month of voice plan is issued, the following entries are made:

Trade receivable

20

Contract asset

10

Revenue – Voice plan

20

A customer sees $30 on his invoice as a payment due for the vice plan, but from the company’s perspective, $10 is a partial repayment of the contract asset (relating to the smartphone), and only $20 relates to the voice plan. Analogous entries are made every month which results in the contract asset being fully transferred to receivables and repaid by the customer.

Contract asset Contract asset Contract asset Contract asset

Contract asset

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