Contractual assets and contractual liabilities : classification and treatment under the new IFRS 15

Abstract

The application of IFRS 15 will force many entities to change their revenue recognition. The purpose of this paper is to familiarize professional users with contractual assets and contractual liabilities. Especially the question of classification and the treatment of contract assets and contract liabilities are of major interest as many changes are expected to take place in this very area. Contract assets and contract liabilities are vital for the right depiction of the economic reality. The rules of IAS 11 have to be explained in order to show what possibilities existed to classify such assets and liabilities. In a subsequent step the insights gained through the analysis of IAS 11 are used to apply those insights for contract asset and contract liabilities under the IFRS 15 regime. IFRS 15 change the classification of those line items, resulting treatment and presentation significantly compared to IAS 11. However, the use and calculation of the percentage of completion method remains unchanged as well as the employment of the concept. The analysis of the new standard reveals the following solutions. The scope of contract assets and contract liabilities is broader than the scope of their conceptual predecessors under IAS 11. Under IFRS 15 contract assets and contract liabilities have to be classified as financial instruments. This circumstance has an influence on the impairment methodology as well as on the disclosure requirements. Both of them are under the jurisdiction of IFRS 9. Furthermore, contract assets and contract liabilities have to be presented on a net-basis if the contract asset and the contract liability originate from the same contract. Contract assets under IFRS 15 have a broader scope of application than the respective concept under IAS 11. Therefore, contract assets are not limited to the use of the percentage of completion method.