Last update 18/11/2019
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 required entities to record contract assets for unbilled accounts receivable when revenue is recognised but not billed. 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. 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 
reclassified as a billed accounts receivable. Contract assets and contract liabilities
Similarly, billings in excess of costs are generally recognised as liabilities. IFRS 15 is based on the notion that a contract asset or contract liability is generated when either party to a contract performs. An entity is required to present these contract assets or contract liabilities in the statement of financial position. 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 today’s 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. Contract assets and contract liabilities
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. 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).
See also: The IFRS Foundation