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33.3 Presenting contract-related assets and liabilities
Publication date: 31 May 2023
us Financial statement presentation guide
The revenue standard provides guidance on presentation of assets and liabilities generated from contracts with customers.
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.
A reporting entity will recognize an asset or liability if one of the parties to a contract has performed before the other. For example, when a reporting entity performs a service or transfers a good in advance of receiving consideration, the reporting entity will recognize a contract asset or receivable in its statement of financial position. A contract liability is recognized if the reporting entity receives consideration (or if it has the unconditional right to receive consideration) in advance of performance.
33.3.1 Contract assets and receivables
The revenue standard distinguishes between a contract asset and a receivable based on whether receipt of the consideration is conditional on something other than the passage of time.
Excerpt from ASC 606-10-45-3 [edits applicable upon adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments]
A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. An entity shall assess a contract asset for impairment in accordance with Topic 310 on receivables. [An entity shall assess a contract asset for credit losses in accordance with Subtopic 326-20 on financial instruments measured at amortized cost. A credit loss of a contract asset shall be measured, presented, and disclosed in accordance with Subtopic 326-20.]
Excerpt from ASC 606-10-45-4 [edits applicable upon adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments]
A receivable is an entity’s right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due…. An entity shall account for a receivable in accordance with Topic 310. […and Subtopic 326-20. Upon initial recognition of a receivable from a contract with a customer, any difference between the measurement of the receivable in accordance with Subtopic 326-20 and the corresponding amount of revenue recognized shall be presented as a credit loss expense.]
The revenue standard requires that a contract asset be classified as a receivable when the reporting entity’s right to consideration is unconditional (that is, when payment is due only upon the passage of time). If a reporting entity transfers control of goods or services to a customer before the customer pays consideration, the reporting entity should record either a contract asset or a receivable depending on the nature of the reporting entity’s right to consideration for its performance. The point at which a contract asset becomes an account receivable may be earlier than the point at which an invoice is issued.
The distinction between a contract asset and a receivable is important because it provides relevant information about the risks related to the reporting entity’s rights in a contract, such as whether the reporting entity only has credit risk or if there are other risks, such as performance risk, remaining. Additionally, as discussed in FSP 33.3.4, contract assets and contract liabilities arising from the same contract are presented net as either a single net contract asset or single net contract liability for presentation purposes.
Reporting entities should follow ASC 310 when considering impairment (ASC 326, once adopted, when considering credit losses) of contract assets or receivables. Refer to FSP 8 for further discussion of presentation and disclosure of impaired receivables (prior to adopting ASC 326). Refer to LI 12 for discussion of presentation and disclosure of credit losses (post adoption of ASC 326).
Example FSP 33-4 illustrates the distinction between a contract asset and a receivable. This concept is also illustrated in Examples 39 and 40 of the revenue standard (ASC 606-10-55-287 through ASC 606-10-55-294).
EXAMPLE FSP 33-4
Distinguishing between a contract asset and a receivable
Distinguishing between a contract asset and a receivable
Manufacturer enters into a contract to deliver two products to Customer (Products X and Y), which will be delivered at different points in time. Product X will be delivered before Product Y. Manufacturer has concluded that delivery of each product is a separate performance obligation and that control transfers to Customer upon delivery. No performance obligations remain after the delivery of Product Y. Customer is not required to pay for the products until one month after both are delivered. Assume for purposes of this example that no significant financing component exists.
How should Manufacturer reflect the transaction in the statement of financial position upon delivery of Product X?
Analysis
Manufacturer should record a contract asset and corresponding revenue upon satisfying the first performance obligation (delivery of Product X) based on the portion of the transaction price allocated to that performance obligation. A contract asset is recorded rather than a receivable because Manufacturer does not have an unconditional right to the contract consideration until both products are delivered. A receivable and the remaining revenue under the contract should be recorded upon delivery of Product Y, and the contract asset related to Product X should also be reclassified to a receivable. Manufacturer has an unconditional right to the consideration at that time since payment is due based only upon the passage of time.
33.3.2 Contract liabilities
A reporting entity should recognize a contract liability if the customer’s payment of consideration precedes the reporting entity’s performance (e.g., by paying a deposit).
If a customer pays consideration or an entity has a right to an amount of consideration that is unconditional (that is, a receivable), before the entity transfers a good or service to the customer, the entity shall present the contract as a contract liability when the payment is made or the payment is due (whichever is earlier). A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer.
Example FSP 33-5 illustrates when a reporting entity should record a contract liability. This concept is also illustrated in Example 38 of the revenue standard (ASC 606-10-55-284 through ASC 606-10-55-286).
EXAMPLE FSP 33-5
Recording a contract liability
Recording a contract liability
Producer enters into a contract to deliver a product to Customer for $5,000. Customer pays a deposit of $2,000, with the remainder due upon delivery (assume delivery will occur three weeks later and a significant financing component does not exist). Revenue will be recognized upon delivery as that is when control of the product transfers to the customer.
How should Producer present the advance payment prior to delivery in the statement of financial position?
Analysis
The $2,000 deposit was received in advance of delivery, so Producer should recognize a contract liability for that amount. The contract liability will be reversed and recognized as revenue (along with the $3,000 remaining balance) upon delivery of the product.
33.3.3 Timing of invoicing and performance
The timing of when a reporting entity satisfies its performance obligation and when it invoices its customer can affect the presentation of assets and liabilities on the statement of financial position. An unconditional right to receive consideration often arises after a reporting entity transfers control of a good or service and invoices the customer, because receipt of payment is based only on the passage of time.
A reporting entity could, however, have an unconditional right to consideration before it has satisfied a performance obligation. For example, a reporting entity that enters into a noncancellable contract requiring advance payment could have an unconditional right to consideration before it performs under the contract. In other words, the right to invoice and collect from the customer is not contingent upon performance, even though the reporting entity may have to refund all or a portion of the payment to the customer if it ultimately does not perform according to the contract. A receivable is recorded in these situations with a corresponding credit to a contract liability (which may be referred to as deferred revenue); however, revenue is not recognized until the reporting entity has transferred control of the goods or services promised in the contract.
The fact that a reporting entity has issued an invoice does not necessarily mean it has an unconditional right to consideration. A reporting entity that invoices the customer cannot record a receivable unless it has concluded it has an unconditional right to consideration.
A reporting entity could, on the other hand, have an unconditional right to consideration before it invoices its customer, in which case the reporting entity should record an unbilled receivable. For example, this could occur if a reporting entity has satisfied its performance obligations, but has not yet issued the invoice.
In certain contracts, including certain commodity arrangements, the transaction price varies based on future changes in the market price that occur after the reporting entity has satisfied its performance obligations. A reporting entity might conclude it has an unconditional right to consideration (and therefore, should recognize a receivable subject to the financial instruments guidance) before the variability arising from changes in the market price is resolved.
Example FSP 33-6 and Example FSP 33-7 illustrate the interaction between the timing of invoicing, performance, and recording a receivable. This concept is also illustrated in Example 38 of the revenue standard (ASC 606-10-55-284 through ASC 606-10-55-286).
EXAMPLE FSP 33-6
Balance sheet presentation — recording a receivable
Balance sheet presentation — recording a receivable
On January 1, Producer enters into a contract to deliver a product to Customer on March 31. The contract is noncancellable and requires Customer to make an advance payment of $5,000 on January 31. Customer does not pay the consideration until March 1.
How should Producer reflect the transaction in the statement of financial position?
Analysis
On January 31, Producer should record a receivable as Producer has an unconditional right to consideration:
Dr. Receivable
|
$5,000
|
|
Cr. Contract liability
|
$5,000
|
On March 1, upon receipt of the cash, Producer should record the following:
Dr. Cash
|
$5,000
|
|
Cr. Receivable
|
$5,000
|
On March 31, upon satisfying the performance obligation, Producer should recognize revenue as follows:
Dr. Contract liability
|
$5,000
|
|
Cr. Revenue
|
$5,000
|
Producer has an unconditional right to the consideration when the advance payment is due because the contract is noncancellable. As a result, Producer records a receivable on January 31.
Producer would not record a receivable on January 31 if the contract were cancellable because, in that case, it does not have an unconditional right to the consideration. Producer would instead record the cash receipt and a contract liability on the date the advance payment is received.
EXAMPLE FSP 33-7
Balance sheet presentation — unbilled receivable
Balance sheet presentation — unbilled receivable
On January 1, Producer enters into a contract to deliver a product to Customer. Producer delivers the product on March 31 and sends an invoice for $5,000 to Customer on April 15. Customer pays the consideration on April 30. There are no other performance obligations in the contract.
How should Producer reflect the transaction in the statement of financial position?
Analysis
On March 31, upon satisfying the performance obligation, Producer would recognize revenue and record a receivable:
Dr. Receivable
|
$5,000
|
|
Cr. Revenue
|
$5,000
|
On April 15, there would be no entry for Producer to record when it issues the invoice.
On April 30, upon receipt of the cash, Producer would record the following:
Dr. Cash
|
$5,000
|
|
Cr. Receivable
|
$5,000
|
Producer has an unconditional right to the consideration after it delivers the product. As a result, Producer would record a receivable on March 31. The receivable is “unbilled” because Producer has not yet issued an invoice; however, the balance should be included with receivables (as opposed to contract assets) because it is an unconditional right to consideration.
33.3.4 Netting of contract assets and contract liabilities
Reporting entities sometimes receive consideration from their customers in advance of performance on a portion of the contract and, on another portion of the contract, perform in advance of receiving consideration. Contract assets and liabilities related to rights and obligations in a contract are interdependent and therefore are recorded net in the statement of financial position.
Question FSP 33-3
Should contract assets and liabilities be presented net even if they arise from different performance obligations in a contract?
Should contract assets and liabilities be presented net even if they arise from different performance obligations in a contract?
PwC response
Yes. We believe a net contract asset or liability should be determined and presented at the contract level, not at the performance obligation level. Refer to Revenue TRG Memo No. 7 and the related meeting minutes in Revenue TRG Memo No. 11 for further discussion of this topic.
Question FSP 33-4
Should contract assets and liabilities be recorded net in the statement of financial position for contracts that are combined in accordance with the revenue standard? Or should they be presented separately?
Should contract assets and liabilities be recorded net in the statement of financial position for contracts that are combined in accordance with the revenue standard? Or should they be presented separately?
PwC response
We believe when contracts are combined and accounted for as a single contract, the presentation guidance should be applied to the combined contract. Contract assets and liabilities should therefore be presented net as either a single contract asset or a contract liability. Refer to Revenue TRG Memo No. 7 and the related meeting minutes in Revenue TRG Memo No. 11 for further discussion of this topic.
Reporting entities should look to other standards on financial statement presentation to conclude if it is appropriate to net contract assets and contract liabilities if they arise from different contracts that are not combined in accordance with the revenue standard.
Question FSP 33-5
How should a reporting entity assess whether to present other balance sheet accounts resulting from accounting for contracts with customers on a net basis (other than contract assets and contract liabilities)?
How should a reporting entity assess whether to present other balance sheet accounts resulting from accounting for contracts with customers on a net basis (other than contract assets and contract liabilities)?
PwC response
The revenue standard only specifically addresses the need to present contract assets and contract liabilities on a net basis. To determine whether it is appropriate to offset other balance sheet accounts (e.g., accounts receivable against refund liabilities), management should assess the general guidance on balance sheet offsetting included in ASC 210-20.
33.3.5 Presentation of contract assets and contract liabilities
The revenue standard does not specify whether a reporting entity is required to present its contract assets and contract liabilities, or other balance sheet accounts related to contracts from customers (e.g., refund liabilities), as separate line items in the statement of financial position. Reporting entities should look to other standards on financial statement presentation to determine if separate presentation is necessary.
While the revenue standard uses the terms “contract asset” and “contract liability,” reporting entities can use alternative descriptions in the statement of financial position (e.g., deferred revenue). Certain industries, for example, have common terms that are used for these situations. Reporting entities can use these alternative descriptions as long as they provide sufficient information to distinguish between those rights to consideration that are conditional (that is, contract assets) from those that are unconditional (that is, receivables).
Question FSP 33-6
In a classified statement of financial position, should contract assets and contract liabilities be presented as current and non-current assets and liabilities?
In a classified statement of financial position, should contract assets and contract liabilities be presented as current and non-current assets and liabilities?
PwC response
Yes. In a classified statement of financial position, reporting entities should refer to the guidance in ASC 210 to distinguish between the current and non-current portions of contract assets and contract liabilities.
Question FSP 33-7
A reporting entity records a refund liability, which is an estimate of cash that will be refunded to customers that return products. Should this refund liability be presented as a contract liability for purposes of disclosure and netting with contract assets?
A reporting entity records a refund liability, which is an estimate of cash that will be refunded to customers that return products. Should this refund liability be presented as a contract liability for purposes of disclosure and netting with contract assets?
PwC response
No. The refund liability described above differs from a contract liability, which is an obligation to transfer goods or services. Therefore, the refund liability should not be included with contract liabilities for purposes of disclosure and netting with contract assets.
33.3.6 Recognition decision tree for contract assets and liabilities
Figure FSP 33-2 illustrates the decision tree used to determine when to recognize a contract asset, receivable, or contract liability.
Figure FSP 33-2
Recognition decision tree
Recognition decision tree
1A reporting entity might conclude it has an unconditional right to consideration if the transaction price varies solely due to future changes in market price (e.g., after the reporting entity has already satisfied its performance obligations).
2If the customer can cancel the contract and receive a refund of the advance payment, the reporting entity should generally exclude such amounts from contract liabilities and record a “customer deposit” or similar liability.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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