Contract assets and contract liabilities

Contract assets and contract liabilities 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 Construction contracts required entities to record contract assets for unbilled accounts receivable when revenue is recognised but not billed (and called project-work  in progress in the past, i.e. the balance of cost incurred in completing a project less invoices billed as per progress reports/construction contract).

A contract asset is recognised when a performance obligation is satisfied (and revenue recognised), but the payment is conditional not only on the passage of time. For the performance obligation to be satisfied, it is required that either a contractual periodical interval has been passed or upon achievement of contractual milestones (i.e. relevant components of the project are completed, based on the project work out and timing plan (for example groundwork, concrete foundation, ground-floor etc).

The other conditions usually relate to entity’s fulfilment of other performance obligations in the contract.Contract assets are different from trade receivables, because trade receivables represent an unconditional right to receive payment. Once the invoice is submitted to the customer, the unbilled receivable is Contract assets and contract liabilitiesreclassified as a billed accounts receivable.

Similarly, billings in excess of costs are generally recognised as liabilities (i.e. contractual billing is 100, costs are 40, leaving 60 to be produced/manufactured/built, as a liability). Contract assets and contract liabilities

IFRS 15 is based on the notion that a contract asset or contract liability is generated when either party to a contract performs (i.e. the builder has reached a milestone and send an invoice, or the client has a contractual obligation to make a payment on groundbreaking). An entity is required to present these contract assets or contract liabilities in the statement of financial position. Contract assets and contract liabilities

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). Contract assets and contract liabilities

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 the old requirements for billings in excess of costs in IAS 11. Contract assets and contract liabilities

Recognition of breakage amount

An entity recognises a prepayment received from a customer as a contract liability and recognises revenue when the promised goods or services are transferred in the future. However, a portion of the contract liability recognised may relate to contractual rights that the entity does not expect to be exercised – i.e. a breakage amount.

The timing of revenue recognition for breakage depends on whether the entity expects to be entitled to a breakage amount – i.e. if it is highly probable that recognising breakage will not result in a significant reversal of the cumulative revenue recognised.

An entity considers the variable consideration guidance to determine whether – and to what extent – it recognises breakage. It determines the amount of breakage to which it is entitled as the amount for which it is considered highly probable that a significant reversal will not occur in the future. Contract assets and contract liabilities

This amount is recognised as revenue in proportion to the pattern of rights exercised by the customer when the entity expects to be entitled to breakage. Otherwise, the entity recognises breakage when the likelihood of the customer exercising its remaining rights becomes remote. Contract assets and contract liabilities

Impairment of contract assets

Contract assets are subject to impairment requirements of IFRS 9. These requirements relate to measurement, presentation and disclosure with respect to impairment (IFRS 15 107). Specifically, entities are required to recognise 12-month expected credit losses on their contract assets at initial recognition and when a significant increase in credit risk has been determined to recognise lifetime expected credit losses (stage 2 – stage 3).


Contract assets and contract liabilities

Contract assets and contract liabilities

Contract assets

Contract assets
Contract liabilities
Contract liabilities
At 1 January Contract assets and contract liabilities 600 500 -364 -169
Interest on contract liabilities Contract assets and contract liabilities

-12 -10
Cumulative catch-up adjustments


Impairment of contract assets Contract assets and contract liabilities


Transfers in the period from contract assets to trade receivables


Amounts included in contract liabilities that was recognised as revenue during the period

362 285
Excess of revenue recognised over cash (or rights to cash) being recognised during the period Contract assets and contract liabilities


Cash received in advance of performance and not recognised as revenue during the period Contract assets and contract liabilities

-198 -80
Contract assets and contract liabilities


600 -213 -364

Contract assets and contract liabilities are included within ‘trade and other receivables’ and ‘trade and other payables’ respectively on the face of the statement of financial position. They arise from the Group’s small design division, which enter into contracts that can take a few years to complete, because cumulative payments received from customers at each balance sheet date do not necessarily equal the amount of revenue recognised on the contracts. Contract assets and contract liabilities

The scope of one design contract (comprising a single performance objective) was changed during the period, which resulted in the cumulative catch-up adjustment of CU 50,000 being recognised in the current period, but which related to performance of the previous period. Contract assets and contract liabilities

The impairment of contract assets during the period arose as a result of one customer entering liquidation prior to the Group having the right to invoice for work done to date.

Interest arose on the contract for which the Group is paid up to two years in advance of delivery. CoOnerous contractsntract assets and contract liabilities

[The balance of trade receivables at 1 January 2017 was CU X’000]
[The amount of incremental costs to obtain a contract which have been recognised as an asset is CU 75,000
(2017 – CU 84,000) and the amount of costs recognised as an expense in the period is CU 79,000 (2017 – CU 48,000). No amount has been impaired in 2018 or 2017.]

IFRS 15 120 An entity shall disclose the following information about its remaining performance obligations:

  1. the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period; and
  2. an explanation of when the entity expects to recognise as revenue the amount disclosed in accordance with paragraph 120(a), which the entity shall disclose in either of the following ways:
    1. on a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations; or
    2. by using qualitative information.

IFRS 15 121 As a practical expedient, an entity need not disclose the information in paragraph 120 for a performance obligation if either of the following conditions is met:

  1. the performance obligation is part of a contract that has an original expected duration of one year or less; or
  2. the entity recognises revenue from the satisfaction of the performance obligation in accordance with paragraph B16.

IFRS 15 122 122 An entity shall explain qualitatively whether it is applying the practical expedient in paragraph 121 and whether any consideration from contracts with customers is not included in the transaction price and, therefore, not included in the information disclosed in accordance with paragraph 120. For example, an estimate of the transaction price would not include any estimated amounts of variable consideration that are constrained (see paragraphs 56–58).

IFRS 15 C6 For any of the practical expedients in Paragraph C5 that an entity uses, the entity shall apply that expedient consistently to all contracts within all reporting periods presented. In addition, the entity shall disclose all of the following information:

  1. The expedients that have been used; and
  2. To the extent reasonably possible, a qualitative assessment of the estimated effect of applying each of those expedients.

Remaining performance Obligations
The vast majority of the Group’s contracts are for the delivery of goods within the next 12 months for which the practical expedient in Paragraph 121(a) of IFRS 15 applies. However, certain design contracts and contracts for the delivery of foods have been entered into for which both:

  • The original contractual period was greater than 12 months; and
  • The Group’s right to consideration does not correspond directly with the performance.

In addition, sales of extended warranties for periods of greater than one year and material rights relating to discounts on future contracts do not meet these conditions.

The amount of revenue that will be recognised in future periods on these contracts when those remaining performance obligations will be satisfied is analysed as follows:

Maturity table

Variable consideration relating to volume rebates has been constrained in estimating contract revenue in order that it is highly probable that there will not be a future reversal in the amount of revenue recognised when the amount of volume rebates has been determined. Therefore, the above amounts do not include the amounts of such variable consideration that has been constrained.

The Group has applied the exemption in Paragraph C5(d) of the transitional rules in IFRS 15 and therefore has not disclosed the amount of revenue that will be recognised in future periods for the comparative period. The effect of applying the other transitional reliefs in IFRS 15 (as set out in the accounting policy above) are as follows…

[Provide qualitative explanation as appropriate to the entity’s circumstances. Depending on the nature of its operations, the impact of taking these exemptions might not be material.]

Disclosures applicable only to entities not applying IFRS 15 on a fully retrospective basis:

IFRS 15 C7A For entities applying IFRS 15 on a cumulative catch-up basis in accordance with IFRS 15 C3(b) and which uses the practical expedient relating to contract modifications in C5(c) disclose the information required by IFRS 15 C6.

[The expedient related to modifications can be applied from start of current period or start of earliest comparative period presented].

IFRS 15 C8 For entities applying IFRS 15 on a cumulative catch-up basis in accordance with IFRS 15:C3(b), disclose:

  1. The amount by which each financial statement line item is affected in the current reporting period by the application of this standard as compared to IAS 11, IAS 18 and reported interpretations that were in effect before the change; and
  2. An explanation of the reasons for significant changes identified in C8(a).

Contract assets and contract liabilities

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit or the local representative in your jurisdiction.

Something else -   Revenue recognition at a point in time

Leave a comment