Contract Assets and Contract Liabilities Under IFRS 15: Contract Asset vs Contract Liability vs Receivable

1. What is the difference between a contract asset, a contract liability and a receivable?

Start with the sentence that does the work. Everything else in this article is a consequence of it.

Where the Appendix A definition adds something

The body of the standard describes a contract asset by reference to what has happened. Appendix A describes it by reference to the condition, and the Appendix is an integral part of the standard, so it carries the same authority.

The same contract can produce all three at once

This surprises people. It should not. Take a construction contract measured over time under IFRS 15.35(b), where the customer has paid a mobilisation advance, the entity has certified work in excess of the amount it is entitled to bill this quarter, and one certificate has been signed and invoiced. That single contract produces revenue, a receivable for the invoiced certificate, and a net contract position which is the advance netted against the uncertified excess. Whether that net position is an asset or a liability depends on which is bigger. The receivable stands outside it either way.

Local FAQs

Does raising an invoice convert a contract asset into a receivable? Only if the invoice creates an unconditional right. Where the entity can invoice on a payment schedule but the customer can withhold or set off against unfinished work, the right is still conditional and the balance stays a contract asset under IFRS 15.107, notwithstanding the invoice.

Is retention on a construction contract a receivable or a contract asset? It depends on the retention clause. Where the amount is only payable once the defects period expires with no defects, something other than time is required and the balance is a contract asset. Where the retention is released purely on a date, it is a receivable under IFRS 15.108.

Can a contract produce a contract asset before any revenue is recognised? No. A contract asset is a right to consideration in exchange for goods or services the entity has transferred (IFRS 15.107). No transfer, no contract asset. Costs incurred ahead of transfer are dealt with under IFRS 15.95 as a cost asset, which is a different balance entirely.

Potential risks

The recurring risk is a chart of accounts that predates 2018. Where "accrued income" and "amounts recoverable on contracts" survive as ledger codes and are mapped straight into trade receivables in the disclosure, the entity is presenting conditional rights as unconditional ones. That misstates the receivables note, misstates the credit risk disclosure under IFRS 7, and removes the contract asset line that IFRS 15.116(a) requires. It is a presentation error, but on a large contracting balance sheet it is a material one.

2. Why does the contract asset versus receivable distinction matter in practice?

It is tempting to see this as cosmetic. Both are assets, both are recovered in cash, both are impaired under IFRS 9. So why does the standard force them apart? Three reasons, and each has an audit consequence.

Risk one: the entity might not finish

A receivable of 10 million says the entity has done everything and is waiting for money. A contract asset of 10 million says the entity has done the work, has recognised the revenue, and still has to complete something before it is even entitled to ask for the money. If the contract is terminated, if the customer rejects the work, or if a condition is not met, the contract asset may never become a receivable at all. That exposure is not credit risk. It is performance risk sitting on the asset side of the balance sheet, and it is invisible if the balance is buried in trade receivables.

This is why the distinction matters more in over-time recognition than anywhere else. Recognising revenue over time under IFRS 15.35 almost always creates a contract asset, because revenue accrues continuously and billing does not. Entities that move a lot of revenue into over-time recognition should expect a contract asset balance to appear and grow, and the absence of one is itself a review point.

Risk two: the impairment path is not identical

Both balances go into IFRS 9. But the amount exposed to credit loss differs. For a receivable, the gross carrying amount is the amount the customer owes. For a contract asset there is a prior question: what is the entity actually entitled to if things go wrong? IFRS 15.107 requires impairment "on the same basis as a financial asset that is within the scope of IFRS 9", which imports the expected credit loss mechanics but does not tell the entity to assume completion. Where completion is doubtful, the issue is not an expected credit loss at all. It is whether the revenue and the resulting contract asset should have been recognised at that amount in the first place, which loops back to the measure of progress and, where consideration is uncertain, to the constraint in IFRS 15.56 to IFRS 15.58 discussed in the variable consideration unit of this cluster.

Risk three: the disclosure requirements diverge

IFRS 15.116(a) requires the opening and closing balances of receivables, contract assets and contract liabilities to be disclosed separately if they are not separately presented. IFRS 15.117 then requires an explanation of how the timing of satisfaction of performance obligations relates to the typical timing of payment, and the effect that has on the contract asset and contract liability balances. That explanation is meaningless if the two balances have been merged. IFRS 15.113(b) separately requires impairment losses on receivables and contract assets from customer contracts to be disclosed apart from other impairment losses.

Local FAQs

Can an entity choose to present contract assets within trade receivables? Not without disclosure. IFRS 15.109 allows an alternative description but requires sufficient information for a user to distinguish between receivables and contract assets. Merging them with no split does not meet that.

Does the distinction affect the IFRS 7 credit risk disclosures? Yes. Contract assets are in the scope of the IFRS 7 credit risk disclosures because IFRS 15.107 requires impairment measured, presented and disclosed on the same basis as an IFRS 9 financial asset. They belong in the credit risk analysis, shown apart from trade receivables.

Potential risks

Two failure modes recur. The first is the entity that has no contract asset at all despite recognising material revenue over time, which usually means unbilled amounts have been swept into receivables. The second is the entity that has a contract asset but ages it by invoice date, which produces an ageing profile in which everything is current, because none of it has been invoiced. Neither position survives a focused review.

3. Is a contract liability the same as deferred revenue, and does IFRS 15 mandate the caption?

Why the old label is imprecise

Deferred revenue implies that revenue exists and has been pushed into a later period. A contract liability makes no such claim. It says the entity owes goods or services. The distinction bites in three situations.

First, where the transaction price will change. A contract liability is remeasured as the transaction price is reassessed, and IFRS 15.118(b) explicitly lists cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability as a change requiring explanation. Deferred revenue, as historically understood, was a fixed pot to be released. Second, where consideration is received under an arrangement that fails the IFRS 15.9 contract criteria. Third, where the amount received will never be revenue at all.

Contract liability, refund liability and customer deposit are three different balances

Breakage: the part of a contract liability that becomes revenue without any delivery

Prepaid balances, gift cards, unused data allowances and unredeemed loyalty points all sit in a contract liability. Some of it will never be redeemed.

Local FAQs

Must a contract liability be split between current and non-current? IFRS 15 is silent. IAS 1.69 governs, so the split depends on whether the entity expects to settle the obligation within twelve months or its normal operating cycle. IFRS 18 replaces IAS 1 for annual periods beginning on or after 1 January 2027 and carries the classification requirements forward.

Is a non-refundable upfront fee a contract liability? Usually. Where the fee does not transfer a good or service to the customer, IFRS 15.B49 treats it as an advance payment for future goods or services, so it is recognised as a contract liability and released as those future goods or services transfer.

Does a contract liability arise before cash is received? Yes, if an unconditional right to consideration arises first. IFRS 15.106 uses the earlier of payment made and payment due, so an invoice raised in advance of performance creates a receivable and a contract liability simultaneously.

Potential risks

The commercial risk of the deferred revenue label is that it invites management to talk about the balance as future revenue with a level of certainty the standard does not support. Refund rights, termination rights and variable elements all sit inside it. A user reading "deferred revenue: 400 million" reasonably infers 400 million of revenue is contracted and coming. If part of that is a refund liability under IFRS 15.55, or a liability under IFRS 15.16 on an arrangement that has not yet met IFRS 15.9, the inference is wrong and the entity has not corrected it.

4. At what level do you net contract assets and contract liabilities?

This is the single most common presentation error in this area and it is almost always in the same direction. An entity with a thousand contracts running for the same customer nets the whole relationship down to one number, reports a small net contract liability, and removes a large contract asset and a large contract liability from the balance sheet at the same time. Both totals are understated. Gearing, working capital ratios and the IFRS 15.116 movement disclosure are all affected.

The only legitimate route to a wider netting boundary

Check the arithmetic. Contract assets 500,000 plus 470,000 is 970,000. Contract liabilities 900,000 plus 360,000 is 1,260,000. The error nets to 290,000, which is the difference between the two, and it removes 970,000 of assets and 970,000 of liabilities from the balance sheet. On a small set of contracts that is a rounding issue. Scale it to a contractor with four thousand live contracts and it is a headline number.

Portfolio practical expedient does not change the answer

IFRS 15.4 permits the standard to be applied to a portfolio of contracts with similar characteristics where the entity reasonably expects the effect would not differ materially from applying it to individual contracts. Entities sometimes read that as authority to present portfolio-level net balances. It is not. The expedient is about applying the recognition and measurement requirements efficiently, and it is conditioned on the outcome not differing materially. Where portfolio netting eliminates material gross balances, the outcome differs materially by definition, so the expedient is unavailable on its own terms.

Local FAQs

Can contract assets be netted against contract liabilities for different performance obligations in the same contract? Yes. The unit of account for presentation is the contract, not the performance obligation. A contract with three performance obligations, two ahead of billing and one behind, produces one net contract asset or one net contract liability.

Should a receivable be netted into the contract position? Never. IFRS 15.105 requires unconditional rights to be presented separately, and IFRS 15.107 requires the contract asset to be stated excluding any amounts presented as a receivable.

What if the contracts were entered into at the same time but with different subsidiaries of the same group customer? IFRS 15.17 covers the same customer or related parties of the customer, so group companies are within scope. The other criteria in IFRS 15.17(a) to (c) still have to be met.

Potential risks

The practical risk is that netting level is a system setting, not a judgement anyone revisits. Enterprise resource planning systems default to customer-level aggregation because that is how credit control works. Once that default has been carried into the consolidation for a few years, unwinding it means rebuilding the contract key across billing and revenue sub-ledgers, which is a project rather than an adjustment. Identify it in the first year of a new engagement, not the fifth.

5. Worked example: how does one contract move from contract liability to contract asset and back?

The facts

These are constructed figures for an illustrative example, not a company's reported numbers.

An engineering entity contracts to design, build and commission a bespoke processing line for a customer. The transaction price is fixed at CU 3,000,000 with no variable element. The entity concludes there is a single performance obligation satisfied over time, because the asset created has no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date, which is the criterion in IFRS 15.35(c). Progress is measured on a cost-to-cost input method, which IFRS 15.B18 identifies as an input method based on costs incurred relative to total expected costs. Total expected costs are CU 2,400,000 and do not change.

The payment schedule agreed by the commercial team is: CU 900,000 payable on signature at the start of year 1; CU 600,000 payable on completion of the build phase at the end of year 2; CU 1,500,000 payable on customer acceptance at the end of year 3. Each invoice, once raised, is payable within 30 days and is not subject to withholding, so the invoiced amount is an unconditional right and a receivable under IFRS 15.108.

Check: 480,000 divided by 2,400,000 is 20%, and 20% of 3,000,000 is 600,000. 1,680,000 divided by 2,400,000 is 70%, and 70% of 3,000,000 is 2,100,000, so year 2 revenue is 2,100,000 less 600,000, which is 1,500,000. Year 3 completes the contract, so cumulative revenue is 3,000,000 and revenue in the year is 900,000. The three years sum to 3,000,000.

Year 1 journals

Entry 1 is the point most systems get wrong. The contract liability arises on the earlier of payment and payment becoming due (IFRS 15.106), so it is recognised when the invoice is raised, with a receivable on the other side, not when the cash arrives. Closing position at the end of year 1: cumulative revenue 600,000 less cumulative billings 900,000, giving a contract liability of 300,000. Receivable nil, cash 900,000.

Year 2 journals

Entry 4 is where the flip happens. Revenue of 1,500,000 first extinguishes the 300,000 contract liability carried forward, then creates a contract asset of 1,200,000. Entry 5 recognises no revenue at all. It simply reclassifies 600,000 from a conditional right to an unconditional one. That is the single most useful thing to remember about contract assets: converting one to a receivable is a balance sheet reclassification, never a revenue event.

Closing position at the end of year 2, assuming the invoice is unpaid at the reporting date: cumulative revenue 2,100,000 less cumulative billings 1,500,000, giving a contract asset of 600,000. Plus a receivable of 600,000. Check against entry 4 and 5: contract asset 1,200,000 less 600,000 reclassified is 600,000. The two agree.

Year 3 journals

Contract asset before entry 8 is 600,000 brought forward plus 900,000, which is 1,500,000, exactly the amount the final invoice makes unconditional. All three balances close at nil. Total cash received is 900,000 plus 600,000 plus 1,500,000, which is 3,000,000, equal to total revenue.

Local FAQs

Does the entity present a contract asset and a contract liability for the same contract at the same date? No. Each contract has one net position. Where a contract has multiple performance obligations at different stages, they aggregate to a single figure.

Why does the year 2 entry debit the contract liability first? Because the contract liability represents an obligation that is discharged as the entity performs. Revenue in the year first settles that obligation, then creates a new conditional right. Presenting it as two separate entries is acceptable and arguably clearer, but the net effect must be the same.

What if the year 2 invoice had been payable only after acceptance of the whole contract? Then it would not be an unconditional right and would not be a receivable under IFRS 15.108. The 600,000 would stay inside the contract asset and the closing contract asset would be 1,200,000, with no receivable.

Potential risks

Where a contract runs across a reporting date with an invoice raised just before year end, the ordering of entries 4 and 5 determines whether a contract asset or a receivable is reported. Systems that post the invoice first and the revenue accrual second can leave a negative contract asset for a few days, which then gets reclassified to a contract liability in the reporting pack. Reviewing the sequence of postings in the last week of the year is a small procedure that catches a real presentation error.

6. How are contract assets impaired under IFRS 9, and what does a provision matrix look like?

Which approach applies

IFRS 9.5.5.15 sets out where the simplified approach applies. For contract assets that do not contain a significant financing component, or that do contain one where the entity applies the practical expedient in IFRS 15.63, the entity is required to measure the loss allowance at lifetime expected credit losses. For contract assets that do contain a significant financing component, the entity may choose the simplified approach as an accounting policy, applied consistently, or run the general three stage model in IFRS 9.5.5.3 and IFRS 9.5.5.5. The policy choice for contract assets is made separately from the choice for trade receivables and separately from the choice for lease receivables.

Building the provision matrix

A provision matrix groups exposures into buckets that share credit risk characteristics, applies a lifetime loss rate to each bucket, and sums the result. For trade receivables the buckets are almost always days past due. For contract assets there is no due date, because nothing has been invoiced, so days past due does not exist as a field. The workable substitute is time elapsed since the performance that gave rise to the balance, or expected time to billing. Ageing a contract asset by invoice date produces an ageing in which every balance is current, which tells you nothing.

Contract assets and trade receivables from the same customers also usually share credit risk characteristics, so a common approach is to derive the loss rates from the receivables history and then apply them to the contract asset buckets on the basis that a contract asset will convert into a receivable of that age profile. That is defensible provided the entity documents why the risk characteristics are shared and adjusts for anything specific to the unbilled position.

Worked example: deriving a lifetime loss rate for one bucket

Illustrative figures, constructed for this example.

The entity examines exposures that sat in the "current" bucket at each historical measurement date over the last three years. The total of those exposures was CU 62,500,000. Of that, CU 200,000 was ultimately never recovered. The historical lifetime loss rate for the bucket is 200,000 divided by 62,500,000, which is 0.32%.

The entity then applies forward-looking information as IFRS 9.5.5.17(c) requires. Its principal customers sit in a sector where the forecast default rate for the next twelve months is materially above the average of the three year observation window, and the entity's credit team quantifies the uplift at 25%. The adjusted lifetime loss rate is 0.32% multiplied by 1.25, which is 0.40%. That uplift, and the evidence supporting it, is the part of the exercise that a reviewer should spend time on, because it is the only part that is a judgement rather than arithmetic.

Check each line. 4,200,000 at 0.40% is 16,800. 1,800,000 at 0.90% is 16,200. 900,000 at 2.50% is 22,500. 500,000 at 7.00% is 35,000. 200,000 at 22.00% is 44,000. The gross balances sum to 7,600,000 and the allowances sum to 134,500, which is a blended rate of 1.77%.

The contract asset is presented net of the allowance, at 7,600,000 less 134,500, which is 7,465,500. The charge for the year of 38,500 is the movement in the allowance, not the closing allowance, and it is disclosed separately from impairment losses on other assets because IFRS 15.113(b) requires it.

Local FAQs

Do contract assets ever get written off entirely? Yes. IFRS 9.5.4.4 requires a gross carrying amount to be written off directly where there is no reasonable expectation of recovery. For a contract asset that usually coincides with the contract being cancelled or the claim being abandoned.

Are contract assets included in the IFRS 7.35M credit risk table? Yes, on the same basis as trade receivables, because IFRS 15.107 requires disclosure on the same basis as an IFRS 9 financial asset. They should be shown as a separate class, not merged with trade receivables, since their risk profile differs.

Does the loss allowance affect revenue? No. The allowance and its movement are an impairment charge in the expense lines. The final sentence of IFRS 15.108 makes the same point about the day one difference on a receivable: it goes to expense, not against revenue.

Potential risks

The risk that produces the largest adjustments is not the loss rate. It is the population. Where contract assets sit in a sub-ledger that finance treats as a work in progress balance rather than a customer exposure, they frequently never enter the ECL calculation at all. The symptom is easy to spot: a credit risk note that gives a loss allowance for trade receivables and reports contract assets with no allowance and no explanation of why none is required.

7. Which contract costs are capitalised, and what is the one year practical expedient?

Costs of obtaining a contract

Costs to fulfil a contract

The full mechanics of commission arrangements, including partial incrementality and multi-tier plans, are covered in the contract costs and commissions unit of this cluster, and the five step model that sits above all of it is set out in the IFRS 15 complete guide.

Local FAQs

Is the IFRS 15.94 expedient an accounting policy choice? Yes, and IFRS 15.129 requires the entity to disclose that it has applied it. It should be applied consistently to costs of obtaining contracts with the relevant characteristics rather than picked contract by contract.

Can costs be capitalised on a contract that has not been signed? Under IFRS 15.95(a), yes, where the costs relate to a specifically identifiable anticipated contract. That is the fulfilment limb only. Costs of obtaining a contract under IFRS 15.91 must relate to a contract actually obtained, because IFRS 15.92 defines them by reference to a contract that was won.

Where does the cost asset sit on the balance sheet? It is not a contract asset. It is a separate asset arising from costs, disclosed under IFRS 15.128(a) by main category, such as costs to obtain contracts, pre-contract costs and setup costs. Presenting it within contract assets confuses two different balances with two different impairment tests.

Potential risks

The recurring risk on the obtaining side is a commission plan that mixes drivers. Where a plan pays on new contract value, renewal value, gross margin and a discretionary modifier, only the element that is genuinely incremental to a won contract is capitalised, and separating that requires the plan documentation rather than the payroll total. Where the entity capitalises the whole payment, the asset is overstated and the error compounds every year the plan runs.

8. Over what period is a capitalised commission amortised, and how is the cost asset impaired?

Worked example: a capitalised sales commission across five years

Constructed figures, labelled as an example.

An entity signs a two year subscription contract with a new customer for CU 200,000 in total, invoiced annually in advance and recognised evenly over the term as a series of distinct services under IFRS 15.22(b). It pays the salesperson a commission of CU 60,000, payable only if the contract is signed, and pays a fixed salary of CU 5,000 for the month regardless. Its renewal commission on this class of contract is CU 12,000 for a further two year term. Historical evidence shows the average customer relationship lasts five years.

Step one: is the 60,000 incremental? Yes. It would not have been incurred if the contract had not been obtained, which is the IFRS 15.92 test, and the entity expects to recover it out of the subscription margin, which is the IFRS 15.91 test. The 5,000 salary fails IFRS 15.93 and is expensed.

Step two: what is the amortisation period? The renewal commission of 12,000 is 20% of the initial commission for a contract of similar value. It is not commensurate. The initial commission therefore relates in part to the anticipated renewal contracts described in IFRS 15.95(a), and under IFRS 15.99 the amortisation period is the expected customer relationship of five years, not the two year initial term. Because revenue is recognised evenly, straight line amortisation is consistent with the transfer of the services.

Step three: the renewal commission itself. When the customer renews for a further two years, the 12,000 is commensurate with the renewal it obtains, so it is amortised over the two year renewal term at 6,000 a year.

The total is the same either way, which is why the error survives so long. What differs is the phasing and the asset carried on the balance sheet. At the end of year 2 the correct carrying amount is 60,000 less 24,000, which is 36,000. Under the error it is nil. For a fast-growing subscription business signing new contracts every month, the error suppresses both the asset and reported profit throughout the growth phase, then flatters it later.

The impairment test in IFRS 15.101

Continuing the example. At the end of year 3, the customer has told the entity it will not renew when the current term expires at the end of year 4. Carrying amount of the commission asset is 60,000 less three years of amortisation at 12,000, which is 24,000. Remaining contractual consideration for year 4 is CU 102,000. Applying IFRS 15.102, the entity does not apply the constraint but does adjust for the customer's credit risk, which it assesses at CU 2,000, giving expected consideration of CU 100,000. Costs relating directly to providing that year of service, not yet expensed, are CU 88,000 of hosting, support and third party licence costs.

The remaining carrying amount of 12,000 is amortised over the final year of service, so total expense across the five years is 12,000 in each of years 1 to 3, 12,000 of impairment at the end of year 3, and 12,000 of amortisation in year 4, which is 60,000 in total. The impairment did not change the total charge. It changed when the charge was taken, and it is disclosed separately from amortisation because IFRS 15.128(b) requires the amortisation and any impairment losses to be given separately.

Local FAQs

Can the IFRS 15.101 test be performed on a portfolio of contracts? The paragraph is written contract by contract, referring to the goods or services to which the asset relates. Where a portfolio approach is used under IFRS 15.4, the entity has to be able to demonstrate the result would not differ materially, which is hard where individual contracts are loss-making within a profitable portfolio.

Does the constraint on variable consideration apply to the impairment test? No. IFRS 15.102 expressly excludes IFRS 15.56 to IFRS 15.58 from the calculation of the remaining consideration expected. Credit risk is deducted, but the constraint is not applied.

Is the reversal in IFRS 15.104 optional? No. It is required when the impairment conditions no longer exist or have improved, capped at what the carrying amount net of amortisation would have been.

Potential risks

Stale amortisation periods are the most common finding and the hardest to argue away, because the contradicting evidence sits in the entity's own management information. A close second is capitalising the commission at gross payroll cost while amortising it against a benefit period supported only by an assertion. The evidence for the period should be a churn or retention analysis with a date on it, refreshed at least annually.

9. IFRS 15 has no onerous contract provision, so how is a loss-making contract accounted for?

The IASB removed the onerous contract requirement that IAS 11.36 contained and did not replace it. That was deliberate. IAS 37 already had a general onerous contract requirement, and the Board saw no reason for a revenue-specific one. The practical consequence is that a contract accountant who works only in IFRS 15 will not find the answer, and a contract that is losing money will sit unprovided until someone reaches for IAS 37.

Worked example: the double count

Constructed figures, labelled as an example.

A contract has remaining consideration the entity expects to receive of CU 800,000 and remaining cash costs to complete of CU 1,000,000. Dedicated to the contract are: an item of plant carried under IAS 16 at CU 120,000 with a recoverable amount of CU 90,000, and a contract set-up cost asset capitalised under IFRS 15.95 with a carrying amount of CU 50,000. Assume no penalty for exiting is lower than the cost of fulfilling, so IAS 37.68 points to fulfilment cost.

The overstatement is exactly the carrying amount of the set-up asset. It was written off in step 2 and then charged again through the provision in step 3 as an amortisation cost the entity will never actually incur, because the asset no longer exists. The rule that prevents it is simple: once an asset has been written down under step 1 or step 2, its future amortisation or depreciation cannot form part of the unavoidable costs used to size the IAS 37 provision. The provision measures the shortfall in cash and other resources still to be given up, not accounting charges already taken.

Local FAQs

Does IFRS 15 anywhere require a loss on a contract to be recognised immediately? No. IFRS 15 contains no onerous contract requirement. IFRS 15.101 will often produce an immediate write-down of the cost asset on a loss-making contract, but that is an impairment test, not a loss provision, and it stops at the carrying amount of the asset.

Is the onerous contract assessment made at contract level or performance obligation level? IAS 37 applies to the contract. The performance obligation is an IFRS 15 unit of account for revenue recognition and it does not carry over into IAS 37, so a contract with one loss-making obligation and one profitable obligation is assessed on the contract as a whole.

What if the contract is loss-making only because of a variable consideration constraint? Then examine the constraint first. IFRS 15.102 switches the constraint off for the IFRS 15.101 test, and IAS 37.68 measures the cost of fulfilment against the economic benefits expected, which is not the same as the constrained transaction price. A contract can be loss-making for accounting purposes and profitable in cash terms purely because of the constraint, and that should be understood before a provision is recognised.

Potential risks

The risk that produces restatements is a provision sized from a management contract review that mixes cash costs with accounting allocations. Depreciation on shared plant, allocated head office recharges that would continue regardless, and amortisation of assets already impaired all find their way into "cost to complete" schedules because that is how the operational forecast is built. Sizing the provision from the operational forecast without stripping those out is the most common way an onerous contract charge ends up overstated.

10. How do significant financing components interact with contract assets and contract liabilities?

The exceptions and the expedient

IFRS 15.62 removes three situations from the analysis. IFRS 15.62(a) covers advance payment where the timing of transfer is at the customer's discretion, which takes most gift cards and prepaid balances out of scope. IFRS 15.62(b) covers consideration that is substantially variable on an event outside either party's control, using a sales-based royalty as the example. IFRS 15.62(c) covers a difference between promised consideration and cash selling price that arises for reasons other than finance and is proportional to that reason, with performance protection given as the example, which is the paragraph that deals with retentions on construction contracts.

IFRS 15.63 then provides the practical expedient: where the entity expects at contract inception that the period between transfer and payment will be one year or less, it need not adjust for the financing component. IFRS 15.129 requires disclosure of the fact that the expedient has been applied. IFRS 15.64 requires the discount rate to be the rate in a separate financing transaction between the entity and its customer at contract inception, reflecting credit characteristics and any collateral, and prohibits updating that rate afterwards for changes in interest rates or in the assessment of credit risk.

Worked example: a contract liability that accretes

Constructed figures, labelled as an example.

A customer pays CU 1,000,000 in advance for a bespoke asset that will transfer at the end of year 3. The timing of transfer is fixed by the contract and is not at the customer's discretion, so IFRS 15.62(a) does not apply. The period exceeds one year, so IFRS 15.63 is unavailable. The rate in a separate financing transaction between the entity and this customer at inception, determined under IFRS 15.64, is 5%.

Check: 1,000,000 compounded at 5% for three years is 1,157,625, and the total interest of 50,000 plus 52,500 plus 55,125 is 157,625, which reconciles.

Revenue is 1,157,625 against cash of 1,000,000. The entity recognises more revenue than it received because it also incurred 157,625 of interest expense in getting there, and IFRS 15.65 requires those two effects to appear on separate lines. Netting them into a single revenue figure of 1,000,000 misstates both revenue and finance costs, and is a common error where the entity's treasury system has no visibility of the contract balance.

Local FAQs

Does the significant financing component change whether the balance is a contract asset or a contract liability? No. It changes the measurement, not the classification. The conditionality test in IFRS 15.107 and IFRS 15.108 is unaffected.

Can the discount rate be updated if the customer's credit deteriorates? No. IFRS 15.64 prohibits updating the rate after contract inception for changes in interest rates or other circumstances, and expressly names a change in the assessment of the customer's credit risk. Credit deterioration is dealt with through the IFRS 9 loss allowance instead.

Is retention money a significant financing component? Generally no. IFRS 15.62(c) covers a difference arising for reasons other than finance and proportional to that reason, and retention exists to protect the customer against non-performance rather than to provide finance.

Potential risks

The risk is asymmetry in application. Entities are quick to identify financing components where they are financing the customer, because the interest income is welcome, and slow to identify them where the customer is financing them, because the interest expense is not. A quick test is to list every contract where cash is collected more than twelve months before performance and check how many carry an accreted contract liability. If the answer is none, the assessment has not been performed evenly.

11. What does IFRS 15 require to be disclosed about contract balances?

Check the contract asset column: 7,200 plus 11,600 less 10,900 plus 560 less 135 plus 340 is 8,665. Contract liabilities: 12,400 less 9,100 plus 10,300 plus 820 is 14,420. A table of this shape delivers IFRS 15.116(a), IFRS 15.116(b) and the quantitative half of IFRS 15.118 in one place, which is why it is the format that surfaces most often in better annual reports.

Remaining performance obligations

Cost asset disclosures

IFRS 15.127 requires the entity to describe the judgements made in determining the amount of costs incurred to obtain or fulfil a contract and the method used to determine amortisation for each period. IFRS 15.128 requires the closing balances by main category of asset, giving costs to obtain contracts, pre-contract costs and setup costs as the examples, and the amount of amortisation and any impairment losses recognised in the period. IFRS 15.129 requires disclosure where the IFRS 15.63 or IFRS 15.94 practical expedients have been used. Those three paragraphs are frequently reduced to a single sentence about commissions and the balance, which does not deliver the category split IFRS 15.128(a) asks for.

Local FAQs

Is the IFRS 15.116(a) disclosure required if the balances are on the face of the balance sheet? No. The paragraph applies "if not otherwise separately presented or disclosed". Presenting all three on the face satisfies it, but IFRS 15.117 and IFRS 15.118 still require the explanations.

Do the practical expedients in IFRS 15.121 remove the need to say anything? No. IFRS 15.122 requires the entity to explain qualitatively whether it is applying the expedient and what consideration has been excluded from the transaction price.

Does the remaining performance obligation disclosure include constrained variable consideration? No, because constrained amounts are not in the transaction price. IFRS 15.122 requires that exclusion to be explained rather than left for the reader to infer.

Potential risks

The disclosure risk in this area is not omission of the table. It is an explanation that repeats the numbers. IFRS 15.117 asks for the relationship between the timing of performance and the timing of payment. IFRS 15.118 asks why the balances moved. A sentence saying contract liabilities increased because more was billed in advance restates the arithmetic and answers neither question.

12. Where does the audit challenge on contract balances actually land?

One: netting at the wrong level

Test it directly. Take the contract asset and contract liability totals from the balance sheet and ask for the underlying schedule showing the net position by contract. If the schedule is by customer, the netting level is wrong. If the schedule exists by contract but the reported totals do not agree to the sum of the positive and negative positions separately, netting has happened somewhere in the consolidation. A useful reconciling test is that the sum of all positive contract positions must equal reported contract assets, and the sum of all negative positions must equal reported contract liabilities, with no relationship between the two. Where a client cannot produce that reconciliation, they have not applied IFRS 15.105 by contract.

Two: contract assets sitting inside trade receivables

The population to look at is anything described as accrued income, unbilled revenue, amounts recoverable on contracts, work in progress on service contracts, or unbilled receivables. For each, ask what has to happen before the customer is obliged to pay. If the answer is anything other than "time passes", it is a contract asset under IFRS 15.107 and it does not belong in trade receivables. This test takes an hour and it finds real misclassification on most contracting and outsourcing balance sheets.

The consequence is not just a wrong caption. Trade receivables is a class for IFRS 7 credit risk purposes, contract assets is a separate class with a different risk profile, and the IFRS 15.116(a) opening and closing balance disclosure requires the two to be split. One misclassification breaks three disclosures.

Three: no expected credit loss on contract assets

Look for the loss allowance on contract assets in the credit risk note. If there is no allowance and no statement that none is required, IFRS 15.107 has not been applied. The usual root cause is organisational rather than technical: contract assets are owned by project accounting, the ECL model is owned by treasury or credit, and neither believes the balance is theirs.

Where an allowance does exist, the second test is whether the loss rates came from a population with comparable credit characteristics and whether the forward-looking adjustment required by IFRS 9.5.5.17(c) has been made and evidenced. A matrix that has used the same five rates since 2019 has not been updated for anything.

Four: stale amortisation periods on capitalised commissions

Ask for the analysis supporting the benefit period and check the date on it. Then ask for the current churn or retention statistics from the commercial team and compare. IFRS 15.100 requires the amortisation to be updated for a significant change in the expected timing of transfer, treated as an IAS 8 change in estimate. Where churn has moved materially and the period has not, there is either an unrecognised change in estimate or an impairment under IFRS 15.101 that has not been tested.

Local FAQs

Which of the four is most likely to require a prior year restatement? Netting, because it usually affects both totals in every comparative period presented and is not correctable prospectively.

Is a missing contract asset ECL always an error? Not necessarily. Where the balance is immaterial or the counterparties carry negligible credit risk, no allowance may be needed. What is required is evidence that the assessment was made, and a statement to that effect. Silence is the problem, not a nil allowance.

Potential risks

The systemic risk is that all four originate in systems, not in judgement, so they are found late and fixed slowly. The contract key that links revenue to billing, the ageing field on unbilled balances, and the feed of contract assets into the ECL engine are all IT deliverables. Raising them in the year end file gives a client no time to act. Raising them at planning gives them a year.

What have regulators found on contract balances?

The FRC published a thematic review of IFRS 15 disclosures in October 2018, covering the first year of application. Its findings pointed at the quality of explanation rather than the arithmetic: companies were asked to explain more clearly how the timing of performance relates to the timing of payment, to describe the nature of contract balances rather than simply present them, and to make the significant judgements disclosure specific to the company rather than generic. Those are the IFRS 15.117, IFRS 15.118 and IFRS 15.123 requirements respectively, and the criticism has recurred in subsequent FRC annual reviews of corporate reporting, in which revenue has remained among the most frequently raised topics in the FRC's correspondence with companies.

ESMA included IFRS 15 in its European Common Enforcement Priorities for the 2018 financial statements and returned to revenue-related matters in later years, focusing among other things on the specificity of disclosure about significant judgements and on the consistency between the revenue note and the narrative reporting elsewhere in the annual report. The consistent thread across both regulators is that boilerplate fails. A note that restates the words of IFRS 15.117 without describing the entity's own billing pattern has not made the disclosure.

Under US GAAP, SEC staff comment letters on ASC 606 have raised similar themes, particularly around the remaining performance obligation disclosure and the use of the practical expedients, asking registrants to explain which expedients they applied and what consideration was excluded. That is the ASC 606 equivalent of IFRS 15.122, and the point is the same on either side. A comparison of the two standards across the whole model is set out in the IFRS 15 versus ASC 606 deep dive.

Five ways entities get contract balances wrong

• Netting by customer instead of by contract. IFRS 15.105 presents "the contract" as a contract asset or a contract liability. Aggregating positions across separate contracts with the same customer is offsetting, prohibited by IAS 1.32 unless another standard requires or permits it, and IFRS 15 does not. The only route to a wider boundary is combination under IFRS 15.17, which is mandatory when its criteria are met and is decided at inception.
• Treating an invoice as the trigger for a receivable. The test in IFRS 15.108 is whether only the passage of time stands between the entity and payment. An invoice the customer can withhold against unfinished work, or that is subject to certification, does not create an unconditional right. Balances invoiced under a payment schedule that runs ahead of the entitlement remain contract assets.
• Leaving contract assets out of the expected credit loss model. IFRS 15.107 requires impairment measured, presented and disclosed on the same basis as an IFRS 9 financial asset, and IFRS 15.113(b) requires the resulting loss to be disclosed separately from other impairment losses. Contract assets held in a project ledger rather than a receivables ledger routinely never reach the ECL calculation at all.
• Amortising a capitalised commission over the initial contract term by default. IFRS 15.99 points the amortisation at the goods or services the asset relates to, and confirms those may be under a specific anticipated contract as described in IFRS 15.95(a). Where the renewal commission is far smaller than the initial one, the initial commission is partly buying the renewal and the period extends. IFRS 15.100 then requires the period to be updated for significant changes.
• Sizing an onerous contract provision before writing down the dedicated assets. IFRS 15.103 requires assets under other standards to be impaired first, then the IFRS 15 cost asset, and IAS 37.69 requires impairment of assets dedicated to the contract before a separate provision is established. Reversing that order leaves recoverable-looking assets on the balance sheet, and including the amortisation of an already-impaired asset in the unavoidable costs double counts the loss.

Frequently asked questions on contract assets and contract liabilities

Key takeaways

• Conditionality decides the classification. IFRS 15.108 makes a right unconditional only where the passage of time is the sole remaining requirement, and everything else earned but conditional is a contract asset under IFRS 15.107.
• The unit of account for presentation is the contract. IFRS 15.105 nets within a contract and never across contracts, and the only route to a wider boundary is combination under IFRS 15.17.
• Deferred revenue is a permitted caption under IFRS 15.109 but an imprecise concept. A contract liability is an obligation to deliver, and it sits alongside, not instead of, refund liabilities under IFRS 15.55 and liabilities under IFRS 15.16.
• Contract assets are inside the IFRS 9 expected credit loss model by virtue of IFRS 15.107, usually through the simplified approach in IFRS 9.5.5.15, and they should be aged by the date the work was performed rather than by an invoice date that does not exist.
• Capitalised costs under IFRS 15.91 and IFRS 15.95 are a separate asset with a separate impairment test in IFRS 15.101, run in the order IFRS 15.103 sets, and amortised over a period that IFRS 15.99 and IFRS 15.100 require to be evidenced and refreshed.
• A loss-making contract is an IAS 37.66 question, not an IFRS 15 one, and the assets go down before the provision goes up.

Related reading in the IFRS 15 cluster

• IFRS 15 revenue recognition: the complete guide, the pillar covering the five step model end to end.
• Identifying performance obligations, the distinctness criteria in IFRS 15.27 and IFRS 15.29.
• Over time versus point in time, the IFRS 15.35 criteria that create most contract assets.
• Variable consideration and the constraint, IFRS 15.50 to IFRS 15.58.
• Allocating the transaction price, the relative stand-alone selling price rule in IFRS 15.74 to IFRS 15.80.
• Contract costs and sales commissions, IFRS 15.91 to IFRS 15.104 in full.
• Contract modifications, IFRS 15.18 to IFRS 15.21.
• SaaS and subscription revenue, where contract liabilities dominate the balance sheet.
• Principal versus agent, IFRS 15.B34 to IFRS 15.B38.
• Licensing intellectual property, IFRS 15.B52 to IFRS 15.B63B.
• Warranties, returns and customer options, IFRS 15.B20 to IFRS 15.B43.
• IFRS 15 industry examples, applied across construction, software, telecoms and services.
• IAS 37 onerous contracts, the standard IFRS 15 sends loss-making contracts to.
• IFRS 15 versus ASC 606, where the two standards diverge in practice.
• IFRS 15 for the ACCA SBR exam, the examinable points and how they are tested.