4.8 Contract Assets and Contract Liabilities
ASC 606 requires the recognition of a (1) contract asset if an entity transfers goods or services to a customer before the customer pays consideration or before payment is due or (2) contract liability if an entity receives consideration (or had an unconditional right to consideration) before it transfers goods or services to the customer. This requirement is similar to the requirement under the legacy guidance in ASC 605-35 related to the recognition of costs in excess of billings or billings in excess of costs.
Like billings in excess of costs, contract liabilities are nonmonetary
liabilities because they require an entity to perform a service in the future.
Contract assets are monetary assets for the same reason that costs in excess of
billings are monetary assets under legacy guidance. That is, contract assets will
ultimately be settled for an amount of cash to be received from the customer.
A separate issue arises if a single contract with a customer contains a performance obligation that is in a contract asset position and another performance obligation that is in a contract liability position. ASC 606 requires an entity to present contract assets and contract liabilities on a net basis in the balance sheet. Therefore, questions have arisen about whether the guidance in ASC 830 should be applied to the gross contract asset and liability balances separately or only to the net contract asset or liability for a single contract.
The guidance in ASC 830 should generally be applied on a gross basis. Therefore,
if a single contract contains both a contract asset and a contract liability, an
entity would remeasure the gross contract asset as of each reporting date at the
current exchange rate. An entity would not remeasure the gross contract liability
since it represents a nonmonetary liability. The requirement to present contract
assets and liabilities on a net basis does not affect the recognition and
measurement of the asset and liability (i.e., the requirement strictly applies to
presentation matters); therefore, the “unit of account” is the gross asset and
liability. Entities are encouraged to consult with their accounting advisers if they
are considering applying the guidance in ASC 830 to the net contract asset/liability
for a single contract.