Definition
Under ASC 606, a contract asset is an entity's right to consideration in exchange for goods or services already transferred when that right is conditioned on something other than the passage of time, such as future performance. Once the right becomes unconditional, it is reclassified to a receivable. A contract liability is the obligation to transfer goods or services for which the entity has been paid or billed. Presentation is on a net basis for each individual contract.
Why it matters in an audit or review
Misclassifying an unbilled amount as a receivable instead of a contract asset changes disclosure and credit loss analysis, since contract assets are also within the scope of ASC 326. Auditors test the contract-level netting, the basis for the percentage complete, and recoverability. Contracts in a loss position need separate evaluation.
Example
(Illustrative) A contractor has earned $300,000 on a contract and billed $260,000. The $40,000 excess is a contract asset (underbilling). If it had billed $330,000, the $30,000 excess would be a contract liability (overbilling).
Common mistakes
- Netting across contracts.
- Calling an unbilled but unconditional amount a contract asset.
Sources
- FASB ASC 606-10-45, Revenue from Contracts with Customers, Presentation (contract assets, receivables, contract liabilities)
- FASB ASC 326-20, Credit Losses (contract assets in scope)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error