A contract’s performing party must show the entity in their statement of financial position. It can be either a contract asset or a liability. This depends on the relationship between the entity and the customer’s payment. All unconditional rights to consideration are separately presented as a receivable. [IFRS 15:105]
If a customer is required to pay consideration or if the entity holds a right unassailable to consideration (i.e. Receivable) before the goods or services are transferred to the customer. The payment must be made on the due date to recognize the liability. Contract liability refers to the obligation to transfer goods/services to customers for which consideration was received from them (or an amount due). [IFRS 15:106]
If an entity transfers goods and services to customers without paying the consideration or making payment, it is a contract asset. The balance does not include amounts that have been presented as receivable. The right to consideration in return for goods or services transferred to a customer is called the contract asset. The asset should first be assessed for impairment using IFRS 9 financial instruments (or, if necessary, IAS39 Financial Instruments: Recognition, Measurement). If the impairment is relevant, it is presented, measured, and disclosed on the exact same basis as financial assets that fall within the scope of IFRS 9 (or IAS39). [IFRS 15:107]
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Receivable is an unconditional right to consideration. A receivable is a right to consideration that is unconditional. This means that payment of the consideration will only be due after a certain period of time. Receivables will be acknowledged if the entity has a current right to payment, even though the amount could be subject to a refund in future. The IFRS 9 (or IAS39) should be applied to the account. Any difference between the receivable’s amount and revenue should be recognized at the initial recognition. as an impairment loss. [IFRS15:108] IFRS9 Presentation of contract assets
IFRS 15, which uses the terms contract asset’ or contract liability, does not forbid an entity to use alternative descriptions in its statement of financial situation. A contract asset can be described in an alternative way. However, the information must be sufficient to allow users to distinguish between receivables or contract assets. [IFRS15:109] IFRS9 Presentation of contract assets
Present a contract as a single asset or contract liability
A contract with multiple performance obligations (or multiple contracts that are accounted for as a single combined contract according to TRG with IFRS15.17) may have less revenue than revenue recognized for some performance obligations. However, revenue for other obligations is higher.
A company should not have separate contract assets for performance obligations where the total of amounts paid by customers and unpaid amounts that are recognized as receivables is less than the revenue recognized) and contract liabilities when the opposite applies. The contract as a whole is the appropriate unit of account to present contract assets and liabilities. Therefore, it is not appropriate for both contract assets and liabilities to be presented for a single contract. Instead, one net figure should be presented.
IFRS 15.105 provides that an entity must present any unconditional rights to consideration separately as a receivable” A receivable shall be designated as an entity that presents any unconditional rights to consideration.
This also applies when multiple contracts are combined. These are accounted for as one contract in accordance with IFRS 15.17.
IFRS15:BC317 explains “the board decided that the remaining rights, performance obligations in a contracted should be accounted for and presented as a net basis. It could either be a contract asset order or a contractor liability. The boards pointed out that obligations and rights in contracts with customers are interdependent. The boards concluded that accounting is the best way to reflect these interdependencies and present on a net basis the remaining rights and liabilities in the statement of financial situation.
A complementary offset of contract liabilities and assets against other assets or liabilitiesIFRS9 Presentation of Contract assets, Contract assets current and non-current, contract, contract as a single contractual asset, contract, contract as a contract liability, IFRS9 Presentation of contracts assets and liabilities
IFRS 15, which defines the terms contract asset’ or contract liability in relation to revenue TRG arising in contracts with customers, provides guidance on how to present such assets and liabilities within the statement of financial condition. Other types of assets and liabilities may be recognized by entities as part of the revenue or other transactions.
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Theshani is a Senior auditor and has experience of 4+ years in providing audit assurance and advisory services to a wide range of industry clients. She continues to stay on top of ever-changing industry dynamics by continuously learning and developing expertise.