Presentation requirements for contract assets and contract liabilities
The revenue model is based on the notion that a contract asset or contract liability is generated when either party to a contract performs, depending on the relationship between the entity’s performance and the customer’s payment. The standard requires that an entity present these contract assets or contract liabilities in the statement of financial position.
When either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. An entity shall present any unconditional rights to consideration separately as a receivable.[IFRS 15.105 – 108]
The following decision tree illustrates how an entity determines whether to recognise a trade receivable, a contract asset or a contract liability in the financial position:
*Assuming the consideration received is equal to the amount to which the entity is entitled for the good or service already transferred.
If the consideration received is less than this amount, the entity may need to recognise a contract asset or a receivable for the difference.
If the consideration received is more than this amount, the entity may need to recognise a contract liability or a refund liability.
** If the customer can cancel the contract and receive a refund of the advance payment, an entity would consider recognising a refund liability.
An entity needs to determine whether a refund liability is characterized as a contract liability based on the specific facts and circumstances of the arrangement. In general, a refund liability typically does not meet the definition of a contract liability.
When an entity concludes that a refund liability is not a contract liability, it presents the refund liability separately from any contract liability (or asset) and the refund liability is not subject to the disclosure requirements in IFRS 15.116-118.
When a customer pays consideration (or consideration is unconditionally due) and the entity has an obligation to transfer goods or services to the customer, the entity recognises a contract liability.
When the entity expects to refund some or all of the consideration received (or receivable) from the customer, it recognises a refund liability. A refund liability generally does not represent an obligation to transfer goods or services in the future.
Similar to receivables (which are considered a subset of contract assets), refund liabilities could be considered a subset of contract liabilities. We believe refund liabilities are also similar to receivables in that they are extracted from the net contract position and presented separately (if material).
This conclusion is consistent with the standard’s specific requirement to present the corresponding asset for expected returns separately.
If an entity concludes, based on its specific facts and circumstances, that a refund liability represents an obligation to transfer goods or services in the future, the refund liability is a contract liability subject to the disclosure requirements in IFRS 15.116-118.
In addition, in that situation, the entity presents a single net contract liability or asset (i.e., including the refund liability) determined at the contract level.
*** The question here is when does it have an unconditional right to payment, if an entity has not transferred a good or service?
The standard states in IFRS 15.108 that a receivable is an entity’s right to consideration that is unconditional. In general, it may be difficult to assert that the entity has an unconditional right to payment when it has not transferred a good or service.
However, an entity may enter into non-cancellable contracts that provide unconditional rights to payment from the customer for services that the entity has not yet completed providing or services it will provide in the near future (e.g., amounts invoiced in advance related to a service or maintenance arrangement).
When determining whether it is acceptable (or required) to recognise accounts receivable and a corresponding contract liability, the contractual terms and specific facts and circumstances supporting the existence of an unconditional right to payment should be evaluated. Factors to consider include:
- Does the entity have a contractual (or legal) right to invoice and receive payment from the customer for services being provided currently (and not yet completed) or being provided in the near future (e.g., amounts invoiced in advance related to a service or maintenance arrangement)?
- Is the advance invoice consistent with the entity’s normal invoicing terms?
- Will the entity commence performance within a relatively short time frame of the invoice date?
- Is there more than one year between the advance invoice and performance?
IFRS 15 Revenue from contracts with customers IFRS 15 Revenue from contracts with customers IFRS 15 Revenue from contracts with customers IFRS 15 Revenue from contracts with customers IFRS 15 Revenue from contracts with customers IFRS 15 Revenue from contracts with customers IFRS 15 Revenue from contracts with customers IFRS 15 Revenue from contracts with customers
When an entity satisfies a performance obligation by transferring a promised good or service, the entity has earned a right to consideration from the customer and, therefore, has a contract asset. When the customer performs first, for example, by prepaying its promised consideration, the entity has a contract liability.
An entity could also have recognised other assets related to contracts with a customer (e.g., the incremental costs of obtaining the contract and other costs incurred that meet the criteria for capitalisation).
The standard requires that any such assets be presented separately from contract assets and contract liabilities in the statement of financial position or disclosed separately in the notes to the financial statements (assuming that they are material). These amounts are also assessed for impairment separately.
Distinction between contract assets and receivables
Contract assets may represent conditional or unconditional rights to consideration. The right is conditional, for example, when an entity must first satisfy another performance obligation in the contract before it is entitled to payment from the customer.
If an entity has an unconditional right to receive consideration from the customer, the contract asset is accounted for as a receivable and presented separately from other contract assets. [IFRS 15.BC323-BC324]
A right is unconditional if nothing other than the passage of time is required before payment of that consideration is due.
In the Basis for Conclusions on IFRS 15, the Board explains that in many cases an unconditional right to consideration (i.e., a receivable) arises when an entity satisfies a performance obligation, which could be before it invoices the customer (e.g., an unbilled receivable) if only the passage of time is required before payment of that consideration is due.
It is also possible for an entity to have an unconditional right to consideration before it satisfies a performance obligation. [IFRS 15.BC325]
In some industries, it is common for an entity to invoice its customers in advance of performance (and satisfaction of the performance obligation). For example, an entity that enters into a non-cancellable contract requiring payment a month before the entity provides the goods or services would recognise a receivable and a contract liability on the date the entity has an unconditional right to the consideration. In this situation, revenue is not recognised until goods or services are transferred to the customer.
In December 2015, the IASB discussed application of IFRS 15 to contracts in which the entity has transferred control of a good to the customer at a point in time, but the consideration to which the entity is entitled is contingent upon a market price (e.g., a commodity price), which will be determined at a future date.
The example assumed that there was no separable embedded derivative (i.e., the entire contract was within the scope of IFRS 15). In discussing this issue, the Board clarified the nature of conditions that might prevent recognition of a receivable.
Specifically, the Board agreed that the variability arising solely from changes in the market price would not be a condition that prevents an entity to recognise a receivable. That is, since the entity has performed, “… nothing else (ie no future event) needs to happen before payment of the consideration is due.
The existence of a price in the future requires no event to occur and depends solely on the passage of time. Changes in the price of Commodity do not affect the entity’s right to consideration, even though the amount that the entity receives is known only on the payment date. In other words, there is no uncertainty with regards to the entity’s entitlement to the consideration.
The entity’s right to consideration is therefore unconditional as understood by IFRS 15…”. Therefore, when the entity performs by transferring control of the good to the customer, it recognises a receivable in accordance with IFRS 9 (and is no longer subject to the requirements in IFRS 15 for the variable consideration constraint).
In the Basis for Conclusions, the Board noted that making the distinction between a contract asset and a receivable is important because doing so provides users of financial statements with relevant information about the risks associated with the entity’s rights in a contract.
Although both are subject to credit risk, a contract asset is also subject to other risks (e.g., performance risk). [IFRS 15.BC323]
Under the standard, 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 unconditional rights to consideration (receivables) and conditional rights to receive consideration (contract assets). [IFRS 15.109]
The standard provides the following example of presentation of contract balances:
|Example 38 — Contract liability and receivable (IFRS 15.IE198-IE200)
|Case A—Cancellable contract
On 1 January 20X9, an entity enters into a cancellable contract to transfer a product to a customer on 31 March 20X9. The contract requires the customer to pay consideration of CU1,000 in advance on 31 January 20X9.
The customer pays the consideration on 1 March 20X9. The entity transfers the product on 31 March 20X9.
The following journal entries illustrate how the entity accounts for the contract:
(a) The entity receives cash of CU1,000 on 1 March 20X9 (cash is received in advance of performance):
(b) The entity satisfies the performance obligation on 31 March 20X9:
Case B—Non-cancellable contract
The same facts as in Case A apply to Case B except that the contract is non-cancellable.
The following journal entries illustrate how the entity accounts for the contract:
(a) The amount of consideration is due on 31 January 20X9 (which is when the entity recognises a receivable because it has an unconditional right to consideration):
(b) The entity receives the cash on 1 March 20X9:
(c) The entity satisfies the performance obligation on 31 March 20X9:
If the entity issued the invoice before 31 January 20X9 (the due date of the consideration), the entity would not present the receivable and the contract liability on a gross basis in the statement of financial position because the entity does not yet have a right to consideration that is unconditional.
The standard includes another example of presentation of contract balances that illustrates when an entity has satisfied a performance obligation, but does not have an unconditional right to payment and, therefore, recognises a contract asset: IFRS 15 Revenue from contracts with customers
|Example 39 — Contract asset recognised for the entity’s performance (IFRS 15.IE201-IE204)
On 1 January 20X8, an entity enters into a contract to transfer Products A and B to a customer in exchange for CU1,000. The contract requires Product A to be delivered first and states that payment for the delivery of Product A is conditional on the delivery of Product B.
In other words, the consideration of CU1,000 is due only after the entity has transferred both Products A and B to the customer.
Consequently, the entity does not have a right to consideration that is unconditional (a receivable) until both Products A and B are transferred to the customer.
The entity identifies the promises to transfer Products A and B as performance obligations and allocates CU400 to the performance obligation to transfer Product A and CU600 to the performance obligation to transfer Product B on the basis of their relative stand-alone selling prices.
The entity recognises revenue for each respective performance obligation when control of the product transfers to the customer.
The entity satisfies the performance obligation to transfer Product A:
The entity satisfies the performance obligation to transfer Product B and to recognise the unconditional right to consideration:
Also consider the following example, which illustrates an unbilled receivable (rather than a contract asset):
|Worked example – Unbilled receivable
On 14 September 20X0, Entity L enters into a contract to sell 100 widgets to Customer F at CU10 per widget. All of the widgets are delivered to Customer F on 29 September 20X0. Entity L invoices Customer F on 12 October 20X0.
Entity L determines that revenue is recognised when control of the widgets transfers to Customer F on 29 September 20X0. Entity L records a corresponding receivable because only the passage of time is required before payment of that consideration is due.
That is, Entity L has an unconditional right to consideration as at 29 September 20X0, even though Entity L has not yet issued an invoice. That is, even though the amount is ‘unbilled’, it is still considered a receivable, rather than a contract asset.
Current versus non-current
Unless an entity presents its statement of financial position on a liquidity basis, it needs to present contract assets or contract liabilities as current or non-current in the statement of financial position. Since IFRS 15 does not address this classification, entities need to consider the requirements in IAS 1.
The distinction between current and non-current items depends on the length of the entity’s operating cycle. IAS 1 states that the operating cycle of an entity is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents.
However, when the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 months. [IAS 1.68, IAS 1.70]
IAS 1 does not provide guidance on how to determine whether an entity’s operating cycle is ‘clearly identifiable’. For some entities, the time involved in producing goods or providing services may vary significantly between contracts with one customer to another. In such cases, it may be difficult to determine what the normal operating cycle is. IFRS 15 Revenue from contracts with customers
Therefore, entities need to consider all facts and circumstances and use judgement to determine whether it is appropriate to consider that the operating cycle is clearly identifiable, or whether to use the twelve-month default.
This assessment is also relevant for other assets and liabilities arising from contracts with customers within the scope of IFRS 15 (e.g., capitalised contract costs to obtain and fulfil a contract).
Consequently, an entity assesses, based on the contract terms, facts and circumstances, whether a contract asset or contract liability is classified as current or non-current. It considers:
This assessment might lead to a separation of the contract asset or contract liability into a current and a non-current portion. IFRS 15 Revenue from contracts with customers
Impairment of contract assets
After initial recognition, contract assets, like receivables, are subject to impairment assessments in accordance with IFRS 9. The Basis for Conclusions on IFRS 9.BC5.154 clarifies that contract assets are in scope of IFRS 9 impairment because the IASB considered “the exposure to credit risk on contract assets is similar to that of trade receivables”. [BC5.154] IFRS 15 Revenue from contracts with customers
The expected credit loss model in IFRS 9 focuses on the difference between the contractual cash flows and expected cash flows. [BC5.29] However, the right to receive non-cash consideration does not give rise to cash inflows.
As such, judgement may be needed when the consideration to which the entity is entitled is non-cash. Since the entity does not yet hold the non-cash consideration, the impairment requirements in IAS 36, for example, do not directly apply. IFRS 15 Revenue from contracts with customers
When applying the impairment requirements of IFRS 9 to the contract asset, an entity considers the likelihood of not receiving the non-cash consideration (i.e., non-performance risk). However, this would not consider any potential impairment in the underlying asset to which the entity is entitled.
As such, an entity may need to consider the value of the underlying non-cash consideration to which it is entitled to use as a proxy for the cash inflows when applying the impairment requirements of IFRS 9.
Impairment losses on receivables are presented in line with the requirements of IAS 1 and the disclosure requirements in IFRS 7 apply. [IFRS 7.35A(a)]. In addition, Revenue from contracts wist customers requires that such amounts are disclosed separately from impairment losses from other contracts. [IFRS 15.113(b)] These requirements also apply to impairment losses on contract assets. IFRS 15 Revenue from contracts with customers
Derecognition of contract assets
Contract assets will generally be derecognised when an entity’s right to consideration becomes unconditional, and it is able to recognise a receivable in accordance with IFRS 9. Revenue from contracts wist customers does not provide any additional requirements on derecognising contract assets and only the impairment requirements in IFRS 9 apply to contract assets. IFRS 15 Revenue from contracts with customers
In theory, entities could also apply the derecognition requirements in IFRS 9 by analogy to contract assets. However, in practice, it seems very unlikely that many contract assets would meet the requirements for derecognition in IFRS 9, particularly if they are still conditional on the entity’s future performance.
Initial measurement of receivables
IFRS 9 includes different initial measurement requirements for receivables arising from IFRS 15 contracts depending on whether there is a significant financing component.
- If there is a significant financing component, the receivable is initially measured at fair value [IFRS 18.104.22.168]
- If there is no significant financing component (or the entity has used the practical expedient in IFRS 15.63), the receivable is initially recognised at the transaction price, measured in accordance with IFRS 15 [IFRS 22.214.171.124] IFRS 15 Revenue from contracts with customers
If upon initial measurement there is a difference between the measurement of the receivable under IFRS 9 and the corresponding amount of revenue, that difference is presented immediately in profit or loss (e.g., as an impairment loss). IFRS 15 Revenue from contracts with customers
If the initial measurement of a receivable is at fair value, there may be a number of reasons why differences from the IFRS 15 transaction price may arise (e.g., changes in the fair value of non-cash consideration not yet received). This is the case when the difference is attributable to customer credit risk, rather than an implied price concession. IFRS 15 Revenue from contracts with customers
Implied price concessions are deducted from the contract price to derive the transaction price, which is the amount recognised as revenue. Distinguishing between implied price concessions and expense due to customer credit risk requires judgement.
Impairment losses resulting from contracts with customers are presented separately from other impairment losses. IFRS 15 Revenue from contracts with customers
Presentation requirements for revenue from contracts with customers
The Board decided to require entities to separately present or disclose the amount of revenue related to contracts with customers, as follows: [BC332] IFRS 15 Revenue from contracts with customers
- 15.113(a) requires an entity to disclose (or present in the statement of comprehensive income) the amount of revenue recognised from contracts with customers under IFRS 15 separately from other sources of revenue. For example, a large equipment manufacturer that both sells and leases its equipment should present (or disclose) amounts from these transactions separately.
- 15.113(b) also requires an entity to disclose impairment losses from contracts with customers separately from other impairment losses if they are not presented in the statement of comprehensive income separately. As noted in the Basis for Conclusions, the Board felt that separately disclosing the impairment losses on contracts with customers provides the most relevant information to users of financial statements. [IFRS 15.BC334] IFRS 15 Revenue from contracts with customers
Unless required, or permitted, by another standard, IAS 1 does not permit offsetting of income and expenses within profit or loss or the statement of comprehensive income. [IAS 1.32]
After applying the requirements for determining the transaction price in IFRS 15, revenue recognised by an entity may include offsets, for example, for any trade discounts given and volume rebates paid by the entity to its customers. Similarly, in the ordinary course of business, an entity may undertake other transactions that do not generate revenue, but are incidental to the main revenue-generating activities.
When this presentation reflects the substance of the transaction or other event, IAS 1 permits an entity to present “the results of such transactions … by netting any income with related expenses arising on the same transaction”. [IAS 1.34]
An example given in IAS 1 is the presentation of gains and losses on the disposal of non-current assets by deducting from the amount of consideration on disposal the carrying amount of the asset and related selling expenses. [IAS 1.34(a)]
Other presentation considerations
The standard also includes presentation requirements for products expected to be returned and for those that contain a significant financing component. Here is a link to rights of return and significant financing components for in this respect relevant presentation considerations.
Also refer to capitalised contract costs to obtain and fulfil a contract for in this respect relevant presentation considerations.
What are the disclosure requirements for?
The objective of the disclosure requirements is for an entity to disclose sufficient information to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
An entity is required to disclose, separately from other sources of revenue, revenue recognised from contracts with customers – i.e. revenue in the scope of the standard – and any impairment losses recognised on receivables or contract assets arising from contracts with customers.
If an entity elects either the practical expedient not to adjust the transaction price for a significant financing component or the practical expedient not to capitalize costs incurred to obtain a contract, then it discloses this fact.
It appears that an entity is not required to present revenue from contracts with customers as a separate line item in the statement of profit or loss and may aggregate it with other types of revenue considering the requirements in the presentation standard.
However, in providing a separate disclosure of revenue from contracts with customers – either in the notes or in the statement of profit or loss – it seems likely that an entity should not include amounts that do not fall in the scope of the revenue standard.
The standard includes disclosure requirements on the disaggregation of revenue, contract balances, performance obligations, significant judgements and assets recognised to obtain or fulfil a contract. For further discussion on the required transition disclosures.
IFRS 15 significantly increases the volume of disclosures required in entities’ interim and annual financial statements. The expanded disclosures are in response to criticism that current revenue recognition disclosures are inadequate.
The Boards sought to create a comprehensive and coherent set of disclosures. As a result, and to be consistent with other recent standards, IFRS 15 includes an overall objective for these disclosures, noted below:
The objective of the disclosure requirements in the standards is to provide “sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers”.
To achieve that objective, entities are required to provide disclosures about their contracts with customers, the significant judgements, and changes in those judgements, used in applying the standards and assets arising from costs to obtain and fulfil its contracts.
See detailed disclosure explanation in Revenue disclosure requirements, which provides the disclosure requirements for Revenue from Contracts with Customers in 8 Questions & Answers.