Back-to-back subcontractor claims and liability pass-through

Main contractors frequently assume back-to-back subcontracts pass employer claims, delay damages or defect costs through symmetrically, but the contractor's own liability to the employer and its recovery right against the subcontractor are governed by different recognition thresholds and different counterparties' financial capacity, recognizing a full offsetting recovery asset without independently assessing the subcontractor's ability and willingness to pay overstates net assets and understates real economic exposure.

Has your entity's own liability to the employer, such as liquidated damages or defect rectification cost, actually crystallized as probable, independently of whether a subcontractor pass-through exists? Does the back-to-back subcontract clause genuinely transfer that specific liability, or does local law or the subcontract's own limitation-of-liability cap reduce or exclude the pass-through? Is the subcontractor financially capable of paying, or are there solvency, performance, or dispute concerns that impair the recoverability of the pass-through asset? Is the recovery asset measured net of any recovery constraint rather than assumed to mirror the main liability in full?

1. Assess the entity's own liability to the employer independently: recognize a provision under IAS 37 (for a claim/damages liability) or reflect a reduction in transaction price under IFRS 15 (for liquidated damages as variable consideration), based on the probability and reliable estimation criteria appropriate to that liability, regardless of whether a subcontractor pass-through exists.
2. Separately and independently assess the recovery from the subcontractor: recognize a recovery asset only when recovery is virtually certain (the higher threshol​d applicable to recognizing a reimbursement asset), not merely because the subcontract terms are legally back-to-back.
3. Do not net the liability and the recovery asset in the income statement or present them as automatically symmetrical; present the reimbursement separately as an asset only up to the amount of the related liability.
4. Assess the subcontractor's actual financial capacity, dispute posture, and any caps or exclusions in the subcontract limiting its liability, which frequently mean the pass-through is not one-for-one.
5. Reassess both the employer-facing liability and the subcontractor recovery independently at each reporting date as facts develop, since they can move in different directions or at different speeds.

Measure the subcontractor recovery asset net of any recovery constraint due to a subcontractor liability cap, financial distress, insolvency risk, or a genuinely disputed liability, even where the head contract and subcontract liability clauses are drafted as mirror images of each other. Apply an expected-credit-loss-type lens to the recovery asset's collectability, not merely its contractual existence. Where the head liability and subcontractor recovery are measured on different bases (e.g. IAS 37 probability-weighted provision versus a virtually-certain reimbursement threshold), do not assume they will move symmetrically period to period.

Disclose: (1) the nature and amount of the entity's own claim/damages liability separately from any subcontractor recovery asset, without netting; (2) the basis and probability threshold applied to recognizing the recovery asset (virtually certain); (3) significant judgments where head contract and subcontract liability terms are not perfectly mirrored (caps, exclusions, disputed pass-through); (4) concentration of recovery exposure to a specific subcontractor's credit risk.

• Automatically recognizing a subcontractor recovery asset equal to the full amount of the entity'
• s own liability to the employer, without independently assessing whether recovery is virtually certain
• netting the liability and recovery in the income statement instead of presenting them separately
• ignoring a liability cap or exclusion clause buried in the subcontract that limits the subcontractor'
• s actual exposure below the head contract liability
• failing to reassess the subcontractor'
• s financial capacity to pay when its own financial position deteriorates
• assuming '
• back-to-back'
• drafting alone is sufficient evidence of virtual certainty of recovery.