Which of the following Is True about Accounting for Contract Assets

While the concept behind contract assets and contract liabilities is similar to previous guidelines for construction and production contracts, it has some differences. In addition, according to CSA 606, contractual assets and contractual liabilities can be recognized for all types of contracts. The calculation of the ifRS 15 contractual assets described above is technically correct, and the FR audit team would expect candidates to adopt this approach in the future. However, we also recognize that a significant proportion of candidates can still apply the IAS 11 approach described in this article. For audit periods up to and including June 2022, the en audit team will allocate credits for both approaches. The importance of showing your work in Section C (Constructed Questions with Answers) cannot be overstated, as the marker will be able to lend based on the work available. The purpose of the contract combination is to identify a single unit of account (ASU 2014-09 BC72). The intention of boards of directors to use a combined contract as a unit of account logically implies that the position of a contractual asset or contractual liability should be determined as a whole. Therefore, the rights and obligations of a combined contract can be better presented on a net basis (BC317). An important part of the codification of accounting standards (ASC) 606 is the guideline for the correct presentation of balance sheet items that arise when a company or its client appears in a revenue-related contract. A business provides services by transferring goods or services to a customer, and a customer provides services by paying a business something in return. If one of the two parties fulfils its obligation, the performance is reflected in the conclusion of the company as a contractual asset or contractual obligation. Terminology: The terms “contractual assets” and “contractual liability” were created by ASC 606, but describe well-known concepts.

For example, a contract asset may also be called advance payments payable, unbilled receivables, or unbilled income. Contractual liability can be described as deferred income, unearned income or repayment liability. The change in terminology reflects only the revenue model of CSA 606, where the reclassification of a contractual asset into a receivable depends on meeting performance obligations – not on invoicing a customer. However, companies are not required to use the terms “contract asset” and “contractual liability” for presentation purposes (ASC 606-10-45-5), and many companies continue to use more well-known terms such as “deferred income” on the front of their financial statements (see Apple, Inc.`s 2019 balance sheet). Some argued that an enterprise should report contractual assets and contractual liabilities at the performance obligation level, meaning that both could be represented for a single contract. However, the guidelines explicitly state that contracts are presented on a net basis. Entities should also remember that receivables should be reported separately from contractual assets or contractual liabilities and should not be included in the net asset or liability position of a contract. Calculating the value of the contractual asset or contractual liabilities in accordance with IFRS 15 is very simple. It`s simple: suppose McCoy, when determining the transaction price, concludes that Carmichael will eventually reach the price reduction threshold. Therefore, the estimated transaction price is $15 per unit instead of $20.

On February 1, 20X0, Carmichael will deliver its first 1,000 processors. McCoy will make the following entry: ASC 606 introduces the terms “contractual assets” and “contractual liabilities”, although an entity may use different terms in its financial statements. Contractual liability is recognized when a customer pays consideration in advance or owes a company an initial payment under the terms of a contract. A contractual asset is recognised when an entity has fulfilled a performance obligation but cannot recognise a receivable until other obligations have been fulfilled. While a contractual asset represents a receivable that depends on subsequent performance, a receivable represents an unconditional payment claim. Contract assets and receivables are tested for depreciation. For presentation purposes, contractual assets and liabilities of contracts should be set off at contract level and presented separately in total. Receivables must be presented separately from contractual assets and contractual liabilities. On January 1, 20X9, McGregor Aerospace Corporation entered into a contract terminating on March 31, 20X9 for the supply of a missile guidance system to its customer SD Researchers.

The contract requires SD to pay a consideration of $100,000 in advance on January 31 20X9. The 1. 20X0 January McCoy Technology signs a contract with Carmichael Systems to supply computer processors for $20 per unit. If Carmichael purchases more than 100,000 products in a calendar year, the agreement stipulates that the unit price will be retroactively reduced to $15 through a discount. Assume the same facts as above, except that the contract is not terminable. The following log entries illustrate how McGregor Aerospace accounts for the contract: ASC 606 does not explicitly state whether an entity should report all of its contractual assets and total contractual liabilities as separate items or on a net basis. Taking into account the principles set out in ASC 210-20 and the guidelines that require an entity to report the balances of each balance sheet item separately, an entity should not combine total contractual assets with total contractual liabilities to represent a net position; Instead, the two balances should be presented separately. However, this does not prevent a company from offsetting on a customer basis if there is a right to set-off under CSA 210-20. The FR audit team became aware that the above calculation is still often used by claimants to determine contractual assets and contractual liability. However, this is no longer technically correct and does not comply with IFRS. In general, contractual assets and liabilities are based on past performance. The recognition of a contractual asset or liability depends on the party that acted first.

For example, if a customer pays upfront, the receiving company enters a contractual obligation – an obligation that must be fulfilled in order to “earn” the prepaid consideration. Once the company provides a service by transferring goods or services to the customer, the company can capture revenue and adjust the liability downward. On the other hand, a company could first provide the service by transferring goods or services to the customer and seize a contractual asset and the proceeds of its work, even if it does not yet have a legal right to payment. Once the company is legally entitled to payment, the company can register a claim and remove the contractual asset from its books. The implementation of the CSA 606 Guidelines for Contractual Assets and Liabilities is likely to impact an entity in three key respects. Implementation requires increased collaboration across departments, and companies can see changes in audit and on the balance sheet front. For example, IT may need to modify systems to collect more or different types of data that are attached to the financial statements in the “Disclosures” section. Project managers may need to develop new measures to determine contract performance to support the timing of revenue recognition. The audit will focus more on management`s estimates and internal controls, and auditors will be able to spend more time reviewing internal disclosures and memoranda with policy changes. In addition, some of the balance sheet indicators may change from terms such as “unbilled receivables” and “deferred income” to “contractual assets” and “contractual liabilities”.

Some account balances may also change (DHG). The contract requires the mixing machine to be delivered first and states that the $5,000 payment is not due until PHS has handed over the mixing machine and industrial fryer to WHB. However, SD pays the consideration on February 28, 20X9 (instead of January 31). McGregor hands over the missile guidance system on March 31, 20X9. The following log entries illustrate how McGregor charges for the contract without contractual costs: For jobs where performance obligations are met over a period of time, the degree of completion is required to calculate the amount of revenue that should be entered to date. However, it is not necessary to calculate the estimated result of the contract (except to the extent that it is determined whether the contract is onerous). Contractual liability is a company`s obligation to transfer goods or services to a customer (1) if the customer pays the consideration in advance or (2) if the customer`s consideration is due for goods and services that the company will always provide (ASC 606-10-45-2) – whichever comes first. A possible exception to the past performance rule is a non-cancellable contract where a company displays contractual liability before payment is received.

Suppose a company enters into a contract for the delivery of goods to a customer. The contract cannot be terminated and the company and the customer agree on a payment plan. Suppose a customer`s prepayment date arrives, but the customer doesn`t pay on time. .