When it comes to accounting standards, International Financial Reporting Standards (IFRS) 15 is a crucial guideline for companies. It lays out the principles that govern the recognition, measurement, and disclosure of revenue from contracts with customers. Under IFRS 15, contracts with customers are broken down into two main components: the contract liability and the contract asset. In this article, we will dive deeper into the concept of contract assets and provide an example of how they are recognized and measured under IFRS 15.

What is a Contract Asset?

A contract asset is an amount of revenue that a company has earned for goods or services it has delivered, but for which it has not yet received payment. This type of revenue is recognized at a point in time, as opposed to over a period of time, and is classified as an asset on a company`s balance sheet. Contract assets arise when a company has fulfilled its obligations under a contract but has not yet received payment from the customer.

Example of a Contract Asset under IFRS 15

To illustrate how a contract asset is recognized and measured under IFRS 15, let`s consider an example. Suppose a company ABC enters into a contract with a customer to provide software development services. The contract specifies that the total contract value is $100,000, payable in two installments. The first installment of $50,000 is due at the start of the project, and the second installment of $50,000 is due upon completion of the project.

ABC begins work on the project and invoices the customer for the first installment. The customer pays the first installment as agreed. ABC continues to work on the project and completes it within the stipulated time frame. However, the customer fails to pay the second installment within the contractual period.

Under IFRS 15, ABC would recognize a contract asset of $50,000 on its balance sheet, representing the amount earned but not yet received. The company would need to estimate the amount of payment that it expects to receive from the customer and adjust the contract asset accordingly. If ABC determines that there is no likelihood of receiving payment from the customer, then it would need to recognize a bad debt expense and write off the contract asset.

Conclusion

In conclusion, contract assets are a crucial part of IFRS 15 and represent an earned revenue that has not yet been received. It is essential for companies to recognize and measure contract assets accurately to ensure the proper representation of their financial statements. By understanding the concept of contract assets and the guidance provided under IFRS 15, companies can effectively manage their contracts with customers and ensure compliance with accounting standards.