14.1 Overview
ASC 606-10
45-1 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.
As discussed in Chapter 4,
a contract with a customer creates legal rights and obligations. The rights under
the contract will generally give rise to contract assets as the entity performs (or
accounts receivable, if an unconditional right to consideration exists); and
contract liabilities are created when consideration is received (or receivable) in
advance of performance. Each reporting period, an entity is required to assess its
financial position related to its contracts with customers. Depending on the extent
to which an entity has performed and the amount of consideration received (or
receivable) by the entity under a contract, the entity could record a contract asset
or a contract liability.
Paragraph BC317 of ASU 2014-09 indicates that an entity should present its remaining rights and obligations under a contract on a net basis. The reasoning behind this is that neither party to the contract would continue to fulfill its obligations if it knew that the other party would not perform. Because the rights and obligations in a contract are interdependent, contract assets and contract liabilities that arise in the same contract should be presented net.
Receivables should be recorded separately from contract assets since only the
passage of time is required before consideration is due. That is, receivables are
only subject to credit risk. In contrast, contract assets are subject to more than
just credit risk (e.g., they are also subject to performance risk). As discussed in
paragraph BC323 of ASU 2014-09, the FASB and IASB believed that making a distinction
between contract assets and receivables was important to financial statement users.
Consequently, only contract assets and contract liabilities are reported net.
Accounts receivable should be reported separately.
ASC 606-10-45-5 addresses the use of alternative descriptions for contract assets and contract liabilities as follows:
ASC 606-10
45-5 This guidance uses the terms contract asset and contract liability but does not prohibit an entity from using alternative descriptions in the statement of financial position for those items. If an entity uses an alternative description for a contract asset, the entity shall provide sufficient information for a user of the financial statements to distinguish between receivables and contract assets.
Paragraph BC321 of ASU 2014-09 notes the FASB’s and IASB’s observation that
“some industries have historically used different labels to describe contract assets
and contract liabilities or may recognize them in more than one line item either in
the financial statements or in the notes.” The ASU does not prohibit an entity from
using alternative terms or from using additional line items to present the assets
and liabilities, but it requires an entity to provide appropriate disclosures that
adequately describe the assets and liabilities.
Terms that are commonly used in practice to describe contract assets and contract liabilities include, but are not limited to, the following:
- Contract assets — Unbilled receivables, progress payments to be billed.
- Contract liabilities — Deferred revenue, unearned revenue.
For discussion of income statement presentation matters, including the requirements
in SEC Regulation S-X, see Sections 14.7.3 through
14.7.6.