Contract assets and liabilities are reflected in an entity’s financial statements when a company has a right for meeting a performance obligation. A contract asset will be recognized when a company has a right to consideration from the customer. It occurs when an entity’s right to the payment of goods and services is already transferred to a customer and that right to payment is conditional to something and not the passage of time. For instance, a contract asset will be recognized when a company performs first by meeting certain obligations but must also perform other obligations to be entitled to payment. On the other hand, a contract liability will be recognized when a company has the obligation to transfer to transfer goods or services to a customer and the company has already received consideration from the customer. For instance, a contract liability will be recognized when a customer performs first and a customer’s consideration is due for goods and services that the entity is yet to provide.
The example of a contract agreement in a recent 10-K can be found the annual report of Energy Recovery, Inc, a technology company that solves challenges for the industrial fluid-flow market. Figure 1 shows the recognition of contract assets and contract liabilities in the company’s financial statements. As of December 2020, Energy Recover Inc. had total contract assets of $1.892 million that came from unbilled trace receivables from water segment contract sales (“Energy Recovery Inc.- Annual Report”2021). The contract holdback represented a form of security for the customer. The total contract liabilities amounted to $1.552 million and were as a result of customer advances and additional forward losses from changes in block sizes.
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Figure 1. Energy Recovery Inc. Contract Assets
Reference
Energy Recovery Inc.- Annual Report (2021). Sec. https://sec.report/Document/0001564590-21-029065/
