14.4 Contract Assets

ASC 606-10

45-3 If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset, excluding any amounts presented as a receivable. 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 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 (see also paragraph 606-10-50-4(b)).

A contract asset would exist when an entity has a contract with a customer for which revenue has been recognized (i.e., goods or services have been transferred to the customer) but customer payment is contingent on a future event (e.g., satisfaction of additional performance obligations). Such an amount is commonly referred to as an unbilled receivable.

The following example from the revenue standard illustrates the recording of a contract asset for performance completed under a contract before an unconditional right to consideration exists:

ASC 606-10

Example 39 — Contract Asset Recognized for the Entity’s Performance

55-287 On January 1, 20X8, an entity enters into a contract to transfer Products A and B to a customer in exchange for $1,000. The contract requires Product A to be delivered first and states that payment for the delivery of Product A is conditional on the delivery of Product B. In other words, the consideration of $1,000 is due only after the entity has transferred both Products A and B to the customer. Consequently, the entity does not have a right to consideration that is unconditional (a receivable) until both Products A and B are transferred to the customer.

55-288 The entity identifies the promises to transfer Products A and B as performance obligations and allocates $400 to the performance obligation to transfer Product A and $600 to the performance obligation to transfer Product B on the basis of their relative standalone selling prices. The entity recognizes revenue for each respective performance obligation when control of the product transfers to the customer.

55-289 The entity satisfies the performance obligation to transfer Product A.

55-290 The entity satisfies the performance obligation to transfer Product B and to recognize the unconditional right to consideration.

14.4.1 Contract Asset Impairment

Contract assets need to be assessed for impairment, as noted in ASC 606-10-45-3, which states, in part, that “[a]n entity shall assess a contract asset for credit losses in accordance with Subtopic 326-20 on financial instruments measured at amortized cost.” This requirement is reiterated in Example 31 within ASC 606-10-55-248 through 55-250 (reproduced in Section 6.5) — specifically, in ASC 606-10-55-250, which states, in part, that “the entity assesses any related contract asset or receivable for impairment.” Although the explicit reference to ASC 326-20 in ASC 606-10-45-3 clearly indicates that contract assets need to be assessed for credit losses, contract assets that will be settled by the transfer of noncash consideration (as in Example 31) might be subject to impairment risks other than credit loss (or counterparty nonperformance risk). An entity that records contract assets related to a right of the entity to noncash consideration that is dependent on something other than the passage of time will need to apply judgment when assessing these contract assets for impairment.

As discussed in Section 18.3.3.16, the FASB issued guidance in ASU 2025-07 (effective for annual reporting periods beginning after December 15, 2026, including interim reporting periods within those annual reporting periods) that clarifies that an entity’s right to receive a share-based noncash payment from a customer is accounted for under ASC 606 unless and until the entity’s right to receive or retain the share-based noncash consideration is unconditional under ASC 606. If an entity has a right to receive share-based noncash consideration (e.g., shares) in a contract with a customer, but such right is conditional and based on the entity’s performance under the contract (e.g., delivering a quantity of goods), the entity would record a contract asset (based on the fair value of the share-based noncash payment at contract inception) when or as the entity satisfies its performance obligation. As described in ASC 606-10-32-21, noncash consideration is measured at contract inception. If the value of the noncash consideration changes as a result of the form of the consideration (e.g., a decline in the share price since contract inception), the transaction price (and the initial measurement of any contract asset recorded when or as the entity satisfies its performance obligation) is not adjusted. However, as noted in ASC 606-10-55-250, the contract asset recorded would need to be assessed for impairment. Regardless of any impairment assessment, the revenue recognized should be based on the fair value of the asset at contract inception; any impairment losses would be recognized separately from the revenue recognized (i.e., revenue would not be reduced as a result of any impairment losses).

Entities will need to carefully evaluate what impairment model is appropriate for contract assets when impairment could result from changes in conditions other than counterparty credit or nonperformance risk. The impairment model selected should be applied consistently to similar facts and circumstances, and appropriate disclosure should be provided if material.

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