ASC 606 Contract Assets and Liabilities: An Overview
ASC 606, or the Accounting Standards Codification 606, is the new revenue recognition standard issued by the Financial Accounting Standards Board (FASB). The standard has been adopted by both public and private companies and has changed the way companies recognize revenue from contracts with customers. In this article, we will take a closer look at one of the key concepts of ASC 606 – contract assets and liabilities.
What are Contract Assets?
Contract assets are defined as assets that arise from a company`s rights to receive payment for goods or services that have been transferred to a customer but for which the company has not yet invoiced the customer. In other words, a contract asset represents an amount of revenue that a company has earned under a contract but has not yet been billed.
For example, let`s say a company has completed work on a project for a customer, and the customer has agreed to pay $100,000 for the work done. The company has not yet invoiced the customer for the work, but the amount of $100,000 represents a contract asset that the company has earned.
Contract assets are recognized on the balance sheet as a receivable, under the section for “Accounts and Other Receivables.” Once an invoice is issued to the customer, the contract asset is transferred to accounts receivable, and the company can recognize revenue.
What are Contract Liabilities?
Contract liabilities are defined as obligations that arise from a company`s receipt of payment in advance of providing goods or services to a customer. In other words, a contract liability represents an amount of revenue that a company has received under a contract but has not yet earned.
For example, let`s say a company receives a $10,000 advance payment from a customer for goods or services that will be delivered in the future. The $10,000 represents a contract liability because the company has not yet provided the goods or services for which the customer has paid.
Contract liabilities are recognized on the balance sheet as a current liability. As the company fulfills its performance obligations under the contract, the contract liability is gradually recognized as revenue.
ASC 606 introduces a new way of recognizing revenue from contracts, and contract assets and liabilities are a key part of that. Contract assets represent revenue that a company has earned but has not yet invoiced, while contract liabilities represent revenue that a company has received but has not yet earned. It is important for companies to identify and properly account for their contract assets and liabilities to ensure accurate financial reporting.