What are contract assets and contract liabilities?
Contract assets and contract liabilities are balance sheet items under ASC 606 and IFRS 15. A contract asset arises when a company has recognised revenue but its right to payment still depends on something other than time, such as finishing further work. A contract liability arises when the customer has paid, or payment is due, before the company has delivered.
Also calledcontract assetcontract liabilityunbilled revenue
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- Contract asset
- Revenue ahead of unconditional right
- Contract liability
- Payment ahead of delivery
- Standards
- ASC 606 / IFRS 15
How contract assets and liabilities work
Every contract is presented as a net position. If the company has performed more than the customer has been billed for, and payment depends on further performance, it is a contract asset. Once the right to payment is unconditional, only waiting for the due date, it becomes a receivable instead. If the customer has paid or been invoiced ahead of delivery, the excess is a contract liability, often called deferred revenue. Milestone billing on long projects is a common source of contract assets; annual software subscriptions billed upfront create contract liabilities. Companies disclose opening and closing balances and explain significant changes, so the balances need tracking per contract rather than as a single plug. Contract assets are also assessed for impairment like receivables. RightRev and Trullion track contract balances alongside revenue schedules.
Common questions
What is the difference between a contract asset and a receivable?+
A receivable is an unconditional right to payment, where only time must pass. A contract asset is conditional on something else, such as completing the next stage of work.
Is a contract liability the same as deferred revenue?+
In practice, largely yes. Contract liability is the term used in ASC 606 and IFRS 15 for payments received or due before the company has transferred the goods or services.
Are contract assets and liabilities shown gross or net?+
Net for each contract: a single contract is either a contract asset or a contract liability at a given date, not both.
Software that tracks contract balances
Part of Accountio’s accounting technology coverage · Glossary
