Contract Assets under Asc 606

Contract assets are a crucial component of ASC 606, the new accounting standard that governs revenue recognition for all public companies in the United States. Under ASC 606, contract assets represent the amount of revenue that a company has earned but has not yet billed to the customer. This can be a tricky concept to understand, but it is essential for businesses to master it in order to stay compliant with the new regulations.

The first thing to understand about contract assets is that they arise when a company provides a good or service to a customer but has not yet received payment for it. In other words, a contract asset is essentially an IOU from the customer to the business. This can happen in a variety of situations, such as when a company is providing ongoing services or when a customer has made a down payment on a product but has not yet received it.

The key difference between a contract asset and a receivable is that a contract asset represents revenue that has been earned but not yet billed. This means that the company has satisfied its obligations under the contract and is entitled to the revenue, even if it has not yet been paid. This is different from a receivable, which represents revenue that has been billed but not yet collected.

One important thing to note about contract assets is that they are only recognized under ASC 606 in certain circumstances. Specifically, they are only recognized when the customer has an obligation to pay the company and when the company has an unconditional right to payment. This means that if there is any doubt about whether the customer will pay or if there are contingencies that could affect the payment, a contract asset should not be recognized.

It is also important to note that contract assets are subject to impairment testing, just like other assets. This means that if there is any doubt about the collectibility of the asset, it may need to be written down. For example, if a customer is experiencing financial difficulties and may not be able to pay the full amount owed, the contract asset may need to be written down to reflect the expected amount of payment.

Overall, contract assets are an important concept for companies to understand under ASC 606. While they can be complex, they are a necessary part of the new revenue recognition standard and are essential for ensuring that companies are accurately reporting their financial results. By mastering the concept of contract assets, companies can stay compliant with the new regulations and ensure that they are presenting a clear and accurate picture of their financial performance to investors and other stakeholders.