In plain words
A software company may earn revenue it cannot bill yet, such as usage fees invoiced only after the monthly usage report is finalised. Is this balance a receivable or a contract asset? Under IFRS 15, a receivable is an unconditional right to payment where only time must pass. If the right still depends on something else, it is a contract asset, reclassified to receivables once that condition is met.
Why it matters
Contract assets and trade receivables look similar on a trial balance but carry different rights: a contract asset's realization still depends on satisfying further performance (or at least the passage of a condition other than time), while a receivable is an unconditional right to payment; conflating them misstates liquidity presentation and can misapply ECL logic to a balance whose risk profile is not purely credit risk.
Diagnostic questions
Is the entity's right to the consideration already recognized as revenue conditional on anything other than the passage of time? Does the entity bill in arrears or on milestones, creating a gap between revenue recognition and the right to invoice? Is the simplified ECL approach applied to contract assets in the same manner as trade receivables, using the same provision matrix logic?
Recognition
- At each reporting date, for revenue already recognized but not yet invoiced, test whether the entity's right to consideration is unconditional (only the passage of time is required before payment is due) or conditional on something else (e.g., completing a further milestone, other elements of the same contract).
- If unconditional, present it as a receivable.
- If conditional on more than the passage of time, present it as a contract asset.
- Reclassify a contract asset to a receivable at the point the right becomes unconditional (typically on invoicing under the contract's billing terms, if invoicing itself removes the condition).
- Assess netting only within the same contract: a contract asset and a contract liability can be presented net only if they relate to the same contract, not across different contracts with the same customer.
Measurement
Measure contract assets initially at the amount of consideration the entity expects to be entitled to for performance completed to date. Apply the IFRS 9 expected credit loss simplified approach to contract assets in the same manner as trade receivables (lifetime ECL from initial recognition), using a provision matrix that reflects the specific risk profile of unbilled amounts, which may differ from billed receivables. Reassess the ECL allowance each period alongside the receivables allowance.
Presentation & disclosure
Disclose: (1) contract assets presented separately from trade receivables on the face of the statement of financial position or in the notes; (2) significant changes in the contract asset balance during the period and the reasons; (3) the ECL allowance against contract assets and the methodology applied; (4) the basis for reclassifying contract assets to receivables; (5) any netting applied and confirmation it is limited to the same contract.
Common mistakes
- Recording unbilled but earned amounts directly as trade receivables even though the right to payment is still conditional
- netting a contract asset from one contract against a contract liability from a different contract with the same customer
- failing to apply ECL to contract assets on the assumption that only '
- real receivables'
- carry credit risk
- not tracking the reclassification trigger from contract asset to receivable, leaving stale contract asset balances that never convert
- treating usage true-ups awaiting the next invoice cycle as automatically unconditional.
Simple example
A customer is billed monthly in arrears for usage-based fees; at 30 June, the entity has recognized SAR 45,000 of revenue for June's usage, but under the contract the right to invoice (and therefore to unconditional payment) only arises once the usage report is finalized and the invoice is issued in early July. Journal entry at 30 June (right to consideration is conditional on the invoicing step, not yet unconditional): Dr Contract asset - unbilled usage 45,000 Cr Revenue - subscription (usage-based) 45,000 On 5 July, the invoice is issued and the right becomes unconditional: Dr Trade receivables 45,000 Cr Contract asset - unbilled usage 45,000 ECL is assessed on the SAR 45,000 balance throughout, first as a contract asset and then as a receivable, using the same provision matrix.
Professional judgment
The unconditional-versus-conditional line can be genuinely fine when a contract's billing mechanics create only a short, largely administrative gap between earning revenue and having an unconditional right (e.g., waiting for a monthly usage report to be run) versus a substantive condition (e.g., a further milestone must still be delivered). Judging whether netting across multiple performance obligations within a single, multi-element contract is appropriate also requires care, since contract assets and liabilities on different elements of the same contract may or may not represent a single unit of account depending on how the obligations were combined or kept separate at inception.
Source basis
IFRS 15 · Revenue from Contracts with Customers
Paragraph references
Verified against the official standard texts used in the IFRS Expert skill.
Related issues
Educational and navigation content only. Not professional advice. Does not reproduce official IFRS/IAS text. Consult the authoritative standards and qualified professionals; professional judgment may still be required.