Introduction
A contractor has completed 60 percent of a project. It has invoiced some of the price, and the customer has paid part of that invoice. The examiner asks how the balance owed to the company should be presented. If your answer is “receivables”, you have probably just lost presentation marks. IFRS 15, Revenue from Contracts with Customers, separates three positions on the statement of financial position: the contract asset, the receivable and the contract liability. This article gives you the single test that sorts them, the journal entries, the formula, and the August 2022 ICAG evidence showing why it matters.
IFRS 15 became mandatory for annual periods beginning on or after 1 January 2018. The FR examining-team article we work from says there has been confusion about how to account for contract assets and contract liabilities, so this is a recognised problem area, not an obscure corner.
Concept A — Contract asset
The definition, quoting IFRS 15, is: “An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance).”
In plain English, the entity has done work that has been recognised as revenue, but it has not yet invoiced or received payment for that work, and its right to be paid still depends on something beyond the passing of time, usually more performance. Common labels are “accrued income” or “unbilled revenue”. IFRS 15 uses contract asset and contract liability, but these may also be called accrued income and deferred income respectively.
If you want to see this explained visually with worked examples, watch the full YouTube lesson. Bill walks through every point step by step.
Concept B — Receivable
A receivable is a right to payment that is no longer conditional. Only the passage of time stands between the entity and the cash. Contract assets and contract liabilities must be “distinct from trade receivables which will arise when an invoice has been issued.”
For a simple exam question, invoicing is the shorthand. Once the entity has invoiced for work done, the amount is a trade receivable. The deeper test is whether the right is unconditional.
Concept C — Contract liability
The definition is: “An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer.”
The customer has paid, or payment is due, and the entity still owes the work. This arises when an entity has invoiced the customer or received payment but has not yet done the work, and the invoices or payments exceed the revenue recognised to date. It is often called “deferred income”.
The sorting question
Ask what the entity’s position is and what the right is waiting for.
- Performed, and the right waits for something other than time: contract asset.
- Performed, and the right waits only for time: receivable.
- Customer has paid or payment is due, and the entity has not yet performed: contract liability.
The formula
Revenue recognised to date, less amounts invoiced to date, equals contract asset (if positive) or contract liability (if negative). Beware: some candidates and learning providers still use IAS 11, Construction Contracts, which has been superseded by IFRS 15.
Worked illustration (Profs teaching figures, not from a past paper)
Zendo Build, a fictitious contractor, builds a warehouse for GH¢1,000,000, recognising revenue over time. At the end of Year 1 the contract is 60 percent complete, so revenue is GH¢600,000. Zendo can invoice only at certified milestones, and it has invoiced GH¢400,000. The customer has paid GH¢250,000.
| Step | Entry | GH¢ |
|---|---|---|
| Work performed | Dr Contract asset / Cr Revenue | 600,000 |
| Milestone invoices raised | Dr Receivable / Cr Contract asset | 400,000 |
| Cash received | Dr Bank / Cr Receivable | 250,000 |
At the year end Zendo reports a receivable of GH¢150,000 and a contract asset of GH¢200,000 (revenue GH¢600,000 less invoiced GH¢400,000). In Year 2, when the contract completes, a further GH¢400,000 of revenue is recognised through the contract asset, making it GH¢600,000. The final invoice of GH¢600,000 is debited to receivables and credited to the contract asset, clearing it. That reclassification is the moment the right becomes unconditional.
For the contract liability, suppose a customer pays GH¢300,000 in advance. On receipt: Dr Bank GH¢300,000, Cr Contract liability GH¢300,000. On delivery: Dr Contract liability GH¢300,000, Cr Revenue GH¢300,000. If payment is due and unavoidable but not yet received, the liability can arise when it is due.
What ICAG has actually asked
Corporate Reporting Paper 3.1, August 2022, Question Three(b). Tieku Technologies received GH¢5 million from a customer on 1 April 2021 and delivered the customised equipment on 31 March 2022. The question asked for the IFRS 15 treatment, with calculations and entries, for 5 marks. The marking scheme concluded there was no significant financing component because the upfront payment secured future supply rather than providing finance. Entries: at 1 April 2021, Dr Bank GH¢5,000 thousand, Cr Contract liability GH¢5,000 thousand; at 31 March 2022, Dr Contract liability GH¢5,000 thousand, Cr Revenue GH¢5,000 thousand. The examiner’s comment on the question: “With regards to the IFRS 15, they were not able to state the entries appropriately.”
Same paper, Question One note (vi) and Working 8. A fixed-price construction contract of GH¢60 million, costs to date GH¢32 million, total costs revised to GH¢64 million, and no progress payments received. With nothing invoiced there is no receivable. The marking scheme showed a contract asset of GH¢28 million, being costs of GH¢32 million less the recognised loss of GH¢4 million. That is a loss-making contract, so confirm the method your question requires.
Comparison table
| Feature | Contract Asset | Receivable | Contract Liability |
|---|---|---|---|
| What it is | Conditional right to consideration for work done | Unconditional right; only time must pass | Obligation to perform; customer has paid or payment is due |
| Who moved first | Entity performed, cannot yet bill | Entity performed, entitled to bill or has billed | Customer paid, entity not yet performed |
| Depends on | Future performance, milestone, certification | Only the due date | Entity delivering |
| Everyday label | Accrued income, unbilled revenue | Trade receivable | Deferred income |
| Typical entry | Dr Contract asset / Cr Revenue | Dr Receivable / Cr Contract asset | Dr Bank / Cr Contract liability |
| Statement of financial position | Asset | Asset | Liability |
| Impairment | Expected credit loss, IFRS 9 | Expected credit loss, IFRS 9 | None |
The impairment link
Both receivables and contract assets sit within the expected credit loss model of IFRS 9. For “trade receivables, contract assets and lease receivables, a simplified approach may be applied”, under which lifetime expected credit losses are always calculated. A contract liability is never impaired, because there is nothing to collect.
Mistakes that cost marks
- Writing “receivable” for every unpaid balance.
- Blending contract assets and receivables into one line.
- Calculating the balance using IAS 11 rather than IFRS 15.
- Treating cash received in advance as revenue instead of a contract liability.
- Stating the amount but not the entry. The August 2022 examiner’s comment says exactly this.
📌 EXAM TIP: Answer in this order: (1) state the position (entity performed or customer paid first); (2) state what the right depends on (time only, or something else); (3) give the label (contract asset, receivable or contract liability); (4) give the entry; (5) mention expected credit loss if the question involves asset balances. Memory trick: the CLOCK test. If only the clock has to tick, it is a receivable.
Conclusion
Contract asset, receivable and contract liability are not interchangeable words for “money”. They describe different positions in the performance-payment sequence. Sort the balance first, state the entry, and the presentation marks follow.
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