Contract assets and contract liabilities explained
How contract assets and contract liabilities differ from trade receivables under IFRS 15, how they are calculated, and how to set up and map their lines.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
At year end a consulting engineer has done more work than it has billed. A software house has invoiced a year's licence in advance. A builder has a progress valuation agreed with the client's quantity surveyor but not yet invoiced. The bookkeeper calls these balances "work in progress", "income received in advance" and "accrued income", and posts them wherever seemed right on the day.
IFRS 15 gives these balances names, definitions and a simple calculation. It also insists that they are kept apart from ordinary trade receivables.
The definitions in plain words
ACCA quotes IFRS 15's definitions:
- A contract asset is an entity's right to consideration for goods or services it has transferred to a customer when that right is conditioned on something other than the passage of time, such as the entity's future performance.
- A contract liability is an entity's obligation to transfer goods or services to a customer for which it has received consideration, or the amount is due, from the customer.
Put simply, a contract asset is work done that cannot yet be billed unconditionally, and a contract liability is money received, or billable, for work not yet done. ACCA notes that they are sometimes called accrued income and deferred income.
Conditional or unconditional: when a receivable arises
ACCA explains that contract assets and contract liabilities must be accounted for separately from trade receivables, which arise when an invoice has been issued. The dividing word is "conditioned". If nothing but the passing of time stands between the client and payment, the right is unconditional and it is a receivable. If the client still has to do something, such as finish a phase, reach a milestone or deliver the rest, it is a contract asset.
Two examples in words:
- An engineer has completed a design stage. The contract allows an invoice only once the next stage is approved, and it has not been approved yet. That is a contract asset.
- The same engineer has invoiced the completed stage, and payment is due within the normal credit period. That is a trade receivable.
Revenue to date less amounts invoiced
ACCA explains that under IFRS 15 a contract asset or contract liability is calculated simply as revenue recognised to date less amounts invoiced to date. Where revenue to date is higher, the difference is a contract asset; where invoices are higher, a contract liability.
Investopedia shows the same pattern using a large engineering group's disclosures: income recognised in excess of amounts billed is carried as a current asset ("contract work in progress"), while amounts billed in excess of income recognised are carried as a current liability ("advance billings on contracts"). The names differ; the arithmetic is the same.
A working the reviewer can follow:
| Contract | Revenue to date | Invoiced to date | Result |
|---|---|---|---|
| Contract A | From the measure of progress | From the invoices | Asset if revenue is higher |
| Contract B | From the measure of progress | From the invoices | Liability if invoices are higher |
Work contract by contract, and think carefully before netting one contract's balance against another's. Customer deposits are a common form of contract liability, covered in customer deposits as contract liabilities. The asset side for firms that bill time is discussed in accrued income and unbilled work.
Separate lines from receivables and payables
Because ACCA stresses that these balances are accounted for separately from trade receivables, the statements need distinct lines, or at the very least distinct disclosure. A balance sheet that buries contract assets inside "Trade and other receivables" hides the very distinction IFRS 15 draws: one is a claim the client can enforce today, the other depends on what it still has to do.
The same goes for contract liabilities and trade payables. Money received in advance from a customer is an obligation to perform, not a debt to a supplier, and a lender reading the statements will treat the two quite differently.
Setting up the lines and mapping the accounts
In Achekam's Financials Studio, a firm can add its own statement lines and groups and change the wording of any row title, and later builds keep those choices. "Contract assets" and "Contract liabilities" can each be added as lines that still total into a standard line, so the notes and the cash flow statement stay consistent.
The accounts then have to land on those lines. When the Studio builds a draft, AI mapping suggestions with confidence of 0.5 or more go into the draft at once and are listed as proposals a person can accept, move or set aside. An account called "Work in progress" is a classic trap: for a manufacturer it is inventory, but for a services or construction client it may be a contract asset. Check where it landed rather than accepting the proposal. No rule was found that stops signing while AI proposals are open; the safeguards are the review stages and the partner's signature. The mapping workbench (Canvas, then "Mapping") shows each account's line and note and lets staff move accounts by hand.
Before review:
- decide every open AI mapping proposal;
- inspect every account with "WIP", "accrued income", "deferred income", "advance" or "deposit" in its name;
- confirm that each contract balance is worked out contract by contract, not as a single balancing figure.
ACCA's article on contract assets and contract liabilities explains the balances that arise when revenue is recognised before or after the customer pays.
The question that settles most cases
For any balance a client calls accrued income, deferred income or work in progress, ask: could the client send an invoice for this today and expect to be paid simply by waiting? If yes, it is a receivable. If it still has work to do first, it is a contract asset. If the customer has paid for work not yet done, it is a contract liability.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
