14.2 Contract Liabilities
ASC 606-10
45-2 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.
A contract liability would exist when an entity has received consideration but has not transferred the related goods or services to the customer. This is commonly referred to as deferred revenue. An entity may also have an unconditional right to consideration (i.e., a receivable) before it transfers goods or services to a customer.
The example below, which is reproduced from ASC 606, illustrates how an entity
would account for a contract liability and receivable. (For further discussion about
receivables, see Section
14.5.)
ASC 606-10
Example 38 — Contract Liability and Receivable
Case A — Cancellable Contract
55-284 On January 1, 20X9, an entity enters into a cancellable contract to transfer a product to a customer on March 31, 20X9. The contract requires the customer to pay consideration of $1,000 in advance on January 31, 20X9. The customer pays the consideration on March 1, 20X9. The entity transfers the product on March 31, 20X9. The following journal entries illustrate how the entity accounts for the contract:
- The entity receives cash of $1,000 on March 1, 20X9 (cash is received in advance of performance).
- The entity satisfies the performance obligation on March 31, 20X9.
Case B — Noncancellable Contract
55-285 The same facts as in Case A apply to Case B except that the contract becomes noncancellable on January 31, 20X9. The following journal entries illustrate how the entity accounts for the contract:
- January 31, 20X9 is the date at which the entity recognizes a receivable because it has an unconditional right to consideration.
- The entity receives the cash on March 1, 20X9.
- The entity satisfies the performance obligation on March 31, 20X9.
55-286 If the entity issued the invoice before January 31, 20X9, the entity would not recognize the receivable and the contract liability in the statement of financial position because the entity does not yet have a right to consideration that is unconditional (the contract is cancellable before January 31, 20X9).