IFRS 9 Presentation of contract assets

IFRS 9 Presentation of contract assets and liabilities – General

When either party to a contract has performed, an entity is required to 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. Any unconditional rights to consideration are presented separately as a receivable. [IFRS 15:105]

A contract liability arises if a customer pays consideration, or if the entity has a right to consideration that is unconditional (i.e. a receivable), before the good or service is transferred to the customer. The liability should be recognised either when the payment is made or when the payment is due (whichever is earlier). The contract liability represents the obligation to transfer goods or services to a customer for which consideration has been received (or an amount of consideration is due) from the customer. [IFRS 15:106]

A contract asset arises if an entity performs by transferring goods or services to a customer before the consideration is paid or before payment is due. The balance excludes any amounts presented as a receivable. The contract asset represents the right to consideration in exchange for goods or services that have been transferred to a customer. The asset should be assessed for impairment in accordance with IFRS 9 Financial Instruments (or, for entities that have not yet adopted IFRS 9, IAS 39 Financial Instruments: Recognition and Measurement) and, when relevant, the impairment is measured, presented and disclosed on the same basis as a financial asset that is within the scope of IFRS 9 (or IAS 39). [IFRS 15:107]

A receivable is a right to consideration that is unconditional, i.e. only the passage of time is required before payment of that consideration is due. For example, a receivable will be recognised if the entity has a present right to payment even though that amount may be subject to refund in the future. The receivable should be accounted for in accordance with IFRS 9 (or IAS 39). At initial recognition of the receivable, any difference between the measurement of the receivable in accordance with IFRS 9 (or IAS 39) and the corresponding amount of revenue recognised should be presented as an expense (e.g. as an impairment loss). [IFRS 15:108] IFRS 9 Presentation of contract assets

IFRS 15 uses the terms ‘contract asset’ and ‘contract liability’ but does not prohibit an entity from using alternative descriptions in the statement of financial position for those items. If an alternative description is used for a contract asset, sufficient information should be provided to enable a user of the financial statements to distinguish between receivables and contract assets. [IFRS 15:109] IFRS 9 Presentation of contract assets

IFRS 15 provides the examples, which illustrate how contract assets, contract liabilities and receivables should be considered in relation to each other, these are:

• Example 13.1A Contract liability and receivable [IFRS 15:IE198 – IE200, Example 38] IFRS 9 Presentation of contract assets
• Example 13.1B Contract asset recognised for the entity’s performance [IFRS 15:IE201 – IE204, Example 39] IFRS 9 Presentation of contract assets
• Example 13.1C Receivable recognised for the entity’s performance [IFRS 15:IE205 – IE208, Example 40] IFRS 9 Presentation of contract assets

Presentation of a contract as a single contract asset or contract liability

When a contract (or multiple contracts accounted for as a single combined contract in accordance TRG with IFRS 15:17) contains more than one performance obligation, it is possible that the aggregate of amounts already paid by the customer and unpaid amounts recognised as receivables is less than the revenue recognised for some performance obligations, but exceeds the revenue recognised for other performance obligations. IFRS 9 Presentation of contract assets

In such circumstances, an entity should not present separate contract assets (for those performance obligations for which the aggregate of amounts already paid by the customer and unpaid amounts recognised as receivables is less than the revenue recognised) and contract liabilities (when the converse applies). The appropriate unit of account for presenting contract assets and liabilities is the contract as a whole. Accordingly, it is not appropriate to present both contract assets and contract liabilities for a single contract; instead, a single net figure should be presented.

IFRS 15:105 states that, “[w]hen 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”.

This also applies to circumstances in which multiple contracts are combined and are accounted for as a single contract in accordance with the requirements for combination in IFRS 15:17.

IFRS 15:BC317 explains that “[t]he boards decided that the remaining rights and performance obligations in a contract should be accounted for and presented on a net basis, as either a contract asset or a contract liability. The boards noted that the rights and obligations in a contract with a customer are interdependent. The boards decided that those interdependencies are best reflected by accounting and presenting on a net basis the remaining rights and obligations in the statement of financial position”. The issue was discussed by the TRG in October 2014.

Offsetting contract assets and liabilities against other assets and liabilities

IFRS 15 introduces the terms ‘contract asset’ and ‘contract liability’ in the context of revenue TRG arising from contracts with customers and provides guidance on the presentation of such assets and liabilities in the statement of financial position (see Contract balances disclosures). IFRS 9 Presentation of contract assets

Entities may also recognise other types of assets and liabilities which relate to customers, as a result of revenue or other transactions. Examples might include costs of obtaining a contract capitalised in accordance with IFRS 15:91, financial assets and financial liabilities as defined in paragraph 11 of IAS 32 Financial Instruments: Presentation, and provisions as defined in paragraph 10 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IFRS 9 Presentation of contract assets

In practice, it will not be possible for entities to offset other assets and liabilities against contract assets and liabilities. IAS 1 32 Presentation of Financial Statements prohibits offsetting assets and liabilities unless required or permitted by an IFRS. Neither IFRS 15 nor any other IFRS includes such a requirement or permission in respect of contract assets and liabilities.

This issue was discussed by the TRG in October 2014, with general agreement that entities should refer to other IFRSs when determining whether to offset other assets and liabilities against contract assets and liabilities. IFRS 9 Presentation of contract assets

Presentation of contract assets and contract liabilities as current or non-current

Often contract assets and liabilities will be presented as current in the Statement of Financial Position. This is because they will be realised or settled in the entity’s normal operating cycle (see IAS 1:66(a) for current assets and IAS 1:69(a) for current liabilities). IFRS 9 Presentation of contract assets

In other cases, it may be determined that a contract with a customer extends beyond the entity’s normal operating cycle. In such cases, contract assets and contract liabilities should be analysed between current and non-current elements, by applying the guidance in IAS 1:66 and IAS 1:69, respectively. IFRS 9 Presentation of contract assets

An entity’s normal operating cycle is assumed to be 12 months when not clearly identifiable (IAS 1:68). IFRS 9 Presentation of contract assets

Case of a construction company

Entity C is a construction company and has entered into a contract for which revenue will be recognised over time. The terms of the contract are:

• A stated contract price of CU 100 million; IFRS 9 Presentation of contract assets
• CU 25 million is invoiced on each of four specified milestones; IFRS 9 Presentation of contract assets
• If construction is completed after a specified date, the last milestone payment is reduced by a fixed CU 10 million to CU 15 million (i.e. a total transaction price of CU 90 million) and if completed before a specified date the last milestone payment is increased by up to CU 10 million to a maximum of CU 35 million (i.e. a maximum total transaction price of CU 110 million). Consequently, the contract is analysed as comprising for fixed consideration of CU 90 million and additional variable consideration of somewhere between CU 10 million and CU 20 million.

At its reporting date, Entity C is 80% of the way through the project, having just reached the third milestone, and is well ahead of schedule. Entity C considers it probable that it will receive CU 110 million. However, uncertainties mean that it constrains this estimate to CU 106 million to ensure that it is highly probable that none of the variable consideration recognised as revenue will subsequently reverse. Entity C therefore: IFRS 9 Presentation of contract assets

• Recognises cumulative revenue of CU 84.8 million (estimated transaction price of CU 106 million x 80%); IFRS 9 Presentation of contract assets
• Recognises a receivable of CU 25 million for the third milestone amount invoiced but not yet received; and IFRS 9 Presentation of contract assets
• Recognises a total contract asset of CU 9.8 million. Entity C is not unconditionally entitled to this amount, which is dependent on both achieving the 4th milestone (i.e. completing the construction) and also completing the construction by the date that will result in the 4th milestone payment being CU 21 million. IFRS 9 Presentation of contract assets

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IFRS 9 Presentation of contract assets

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