Contract Assets IFRS 15 Example: Understanding the Impact of IFRS 15 on Contract Assets
The International Financial Reporting Standards (IFRS) 15 is a new accounting standard that has been developed to replace the existing IAS 11 and IAS 18. This new standard provides guidance on how to account for revenue from contracts with customers. As part of this new guidance, companies are required to recognize contract assets and liabilities on their balance sheets. In this article, we will discuss the concept of contract assets, the impact of IFRS 15 on contract assets, and provide an example for better understanding.
What are Contract Assets?
Contract assets refer to the amount of revenue that has been recognized in a company`s financial statements but has not yet been billed to the customer. These assets arise when a company has completed work and satisfied a performance obligation but has not yet invoiced the customer. In other words, it represents the right to receive payment for work that has already been completed but not yet billed.
Impact of IFRS 15 on Contract Assets
IFRS 15 has significant implications for how companies recognize revenue. Under the new standard, companies are required to recognize revenue when control over goods or services is transferred to the customer. This means that revenue recognition will be based on when a company satisfies its performance obligations to the customer, rather than when the company has invoiced the customer. As a result, companies will need to recognize contract assets for revenue that has been earned but not yet billed.
The new guidance also requires companies to assess the likelihood of collecting the contract asset. If it is determined that collection is not probable, the contract asset should be reclassified as a bad debt expense.
Example of Contract Assets under IFRS 15
Let`s take an example to understand the concept of contract assets under IFRS 15. Suppose a construction company enters into a contract with a client to build a commercial property. The contract is for $1 million, and the work is expected to take 12 months to complete. At the end of six months, the company has completed 50% of the work, worth $500,000.
Under IFRS 15, the company would recognize $500,000 as revenue because it has satisfied 50% of the performance obligation. However, the company has not yet billed the customer for the work completed. Therefore, the company would recognize a contract asset of $500,000 on its balance sheet.
In conclusion, IFRS 15 has significant implications for how companies recognize revenue and account for contract assets. Under the new standard, companies must recognize contract assets for revenue that has been earned but not yet billed. Therefore, it is important for companies to understand the impact of IFRS 15 on their financial statements and to ensure that they are following the new guidelines for revenue recognition. By doing so, companies can improve their financial reporting, which can have a positive impact on their business.