Contract Assets Definition under IFRS 15: Understanding the Basics

The International Financial Reporting Standards (IFRS) 15 is a global framework for revenue recognition that became effective on January 1, 2018. Under this standard, companies are required to recognize revenue from customer contracts based on a five-step model.

One of the key concepts of IFRS 15 is the recognition of contract assets, which is defined as an entity`s right to consideration in exchange for goods or services that have been transferred to a customer but have not yet been invoiced or paid for.

In simple terms, contract assets are created when a company has provided goods or services to a customer but has not yet received payment or issued an invoice. This can occur when a company provides services over a period of time or when the customer is entitled to a refund.

Under IFRS 15, contract assets are recognized as an asset on a company`s balance sheet when the following conditions are met:

1. The company has transferred goods or services to the customer.

2. The company has the right to receive payment from the customer.

3. The payment is conditional on something other than the passage of time, such as the completion of a milestone or the satisfaction of a performance obligation.

4. It is probable that the company will collect the payment.

Once a contract asset is recognized on a company`s balance sheet, it must be periodically reviewed for impairment. This means that if there is a significant risk that the company will not be able to collect the payment, the contract asset must be written down to its estimated recoverable amount.

It is important for companies to understand the concept of contract assets under IFRS 15 in order to properly recognize revenue and comply with international accounting standards. Accurately recording contract assets can also provide useful information to stakeholders about a company`s financial performance and ability to collect payments from customers.

In conclusion, contract assets are an essential part of revenue recognition under IFRS 15. By properly understanding and recording these assets, companies can ensure compliance with international accounting standards and provide valuable information to stakeholders.

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