A contractor has performed enough work under a long-term contract to be entitled to bill the customer only once a milestone inspection is passed, which has not yet occurred. The same contractor has separately received an advance payment from a different customer for services it has not yet performed. Under IFRS 15, how should the contractor classify each amount on its balance sheet?
- Both amounts are receivables, since the contractor has already performed work or already been paid, and IFRS 15 does not otherwise distinguish these balance-sheet items
- The unbilled amount is a contract liability and the advance payment is a contract asset, since a contractor only recognizes an obligation once it has physically completed the underlying work
- The unbilled amount is a contract asset, because the contractor's right to consideration is conditional on something other than the passage of time (the inspection); the advance payment is a contract liability, because the contractor now owes the customer a performance obligation
- Both amounts should be presented as revenue immediately, because IFRS 15 requires revenue recognition as soon as either cash changes hands or a milestone is defined in the contract
Why C? And why not the others?
Correct answer: C. The unbilled amount is a contract asset, because the contractor's right to consideration is conditional on something other than the passage of time (the inspection); the advance payment is a contract liability, because the contractor now owes the customer a performance obligation
IFRS 15 paragraphs 105-108 distinguish a contract asset — an entity's right to consideration in exchange for goods or services already transferred, when that right is conditional on something other than the passage of time — from an unconditional right to consideration, which is a receivable, and from a contract liability — an entity's obligation to transfer goods or services to a customer for which the entity has already received (or is due) consideration. The unbilled amount here depends on passing an inspection, a condition other than time, so it is a contract asset; the advance payment creates an obligation to perform, so it is a contract liability. The option calling both amounts receivables is wrong because a receivable requires an unconditional right to payment, which the milestone-dependent amount does not have. The option that swaps the two classifications is wrong on both counts: it mislabels the inspection-conditional amount as an obligation and the prepayment as an asset, the reverse of paragraphs 105-108. The option requiring immediate revenue recognition on both amounts is wrong because recognizing revenue depends on satisfying performance obligations under the contract's five-step model, not merely on cash receipt or the existence of a milestone.
Source: IFRS 15 Revenue from Contracts with Customers, paragraphs 105, 107-108 (contract assets, receivables and contract liabilities)