Contract Asset

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A contract asset is a company's right to payment for goods or services it has already delivered to a customer, when that right still depends on something other than the passage of time, such as completing further work.

Under revenue standards used by both IFRS and US GAAP, a company recognises revenue as it fulfils its promises to customers. Sometimes it earns revenue before it has the unconditional right to bill the customer. The amount earned but not yet billable is a contract asset.

For example, a construction company has completed 40% of a project worth 1,000,000, so it has earned 400,000 of revenue. Under the contract, it can bill the customer only when certain milestones are reached, and none has been reached yet. It records a contract asset of 400,000.

When the right to payment becomes unconditional, such as when a milestone is reached and an invoice can be issued, the contract asset is reclassified as a trade receivable.

Contract assets are common in long-term projects, such as construction, engineering and software development. A growing contract asset balance may signal that billing is falling behind work performed, which ties up cash and can deserve a closer look.

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