Contract Assets: a Worked Example

A business on long contracts earns revenue as the work proceeds but can bill only when the contract allows: at a stage, on acceptance, or when a surveyor certifies the work. In between, the revenue sits on the balance sheet as a contract asset, a real right under a signed contract, but one that pays only once something more happens.

Three features set it apart from a debtor. Its value comes from the business's judgement of how far each job has gone, and no customer has seen a bill for it. It is measured at selling price, so an optimistic view of progress overstates the asset and the profit together. And it falls outside the papers a lender usually lends against: the aged debtors report lists invoices, and the eligible-debt definition in a borrowing base commonly starts from one.

Revenue is recognised over time when a contract meets one of the standard's tests; for a builder on the customer's site, often that the customer controls the work as it proceeds; for a maker building to order in its own factory, that the work has no alternative use to it and the contract gives an enforceable right to payment for performance to date. The business measures progress, by costs incurred against total expected costs or by output, books that share of the price, and deducts what has been billed or has fallen due, contract by contract.

Each contract is shown as one net figure. The move into receivables happens when payment comes to depend only on the passage of time, and it is that move, not the work, that puts the amount on the debtors report.

The labels differ by market. Accounts under NZ IFRS 15 or AASB 15 use the international standard's terms. In the UK, FRS 102's revised Section 23, for periods beginning on or after 1 January 2026, distinguishes contract balances from trade receivables; earlier UK accounts commonly showed the figure within debtors as amounts recoverable on contracts. Many private companies in New Zealand and Australia need not prepare general purpose accounts, and their own accounts may fold it into debtors or work in progress. Full IFRS 15 accounts explain significant changes in the balance. New Zealand's Tier 2 accounts need not, and Australia's Simplified Disclosures ask only for the closing balance, often inside trade and other receivables, so a lender often has to ask.

A maker of modular buildings, constructed for this page like every figure in it, builds classrooms, site accommodation and hospital wards in a factory and installs them under fixed-price contracts, billed at deposit, factory completion, delivery and handover. Its banker sets two years side by side, with days measured against revenue:

Debtors are being collected faster. What has lengthened is the time between doing the work and being allowed to bill it. The cash shows the cost, with stock and creditors flat:

The banker asks for the balance by contract:

The classrooms are the ordinary case, and the questions are when the certificate is due and whether the customer has listed defects. The mine-site contract changes the reading. The standard can allow revenue on a change approved in scope before its price is settled, if the estimated price passes its test against later reversal. The lender asks something narrower: will the customer sign at that price? Until it does, a fifth of the balance (1.5 ÷ 7.2) rests on one conversation, and so could up to 28% of the year's EBITDA (1.5 ÷ 5.3), since the units' costs are already spent. The accounts are not wrong; the schedule shows what the EBITDA is made of.

A trade receivable needs only time: the invoice is out, the due date set, and a customer who does not pay is in breach. A contract asset still waits on an event the customer controls or certifies. So debtor days lengthen when customers pay slowly, and contract asset days when the business performs ahead of its billing points or milestones slip.

Its opposite is the contract liability, money billed or received before the work, such as a deposit. Net, the maker's contract assets exceed its contract liabilities by US$5.6m in year 2, against US$1.5m a year earlier: less of its work is funded by customers, more by its own cash or its bank.

Nor is it stock. Work in progress held as inventory is carried at cost, and its profit arrives on sale. A contract asset is carried at selling price because the revenue is already recognised. For a contractor, the step after it is the progress claim, which can still be cut back when it is certified.

DEFINED IN ONE PARAGRAPH → · FINANCIAL REPORTING, READ BY A LENDER → · PROGRESS CLAIMS →

In a working capital request, contract assets are often where the extra money has gone, so the banker splits the balance by contract and by age. A balance that turns into invoices soon after it is booked is a business working normally. One that sits for several periods, or rests on unsigned variations, is revenue waiting for permission to be billed, and a facility sized on it lends against the outcome of a negotiation.

The document follows the reading. A borrowing base commonly excludes unbilled amounts or admits them only within a sub-limit. An information undertaking can require a monthly contract schedule of revenue recognised, amounts billed and expected billing dates, so the lender sees the balance grow before the annual accounts do. The cash conversion ratio then shows whether the business's estimates are being borne out.

In a default the reading hardens. A general security agreement or debenture reaches the right to be paid for work done, but billing it usually needs the work finished and accepted, and the customer may be entitled under the contract to deduct the cost of finishing elsewhere. What a contract asset realises depends on who completes the job.

QUALITY OF EARNINGS → · WORKING CAPITAL REQUESTS → · ELIGIBLE RECEIVABLES →