Contract Assets and Contract Liabilities Explained: Moving Beyond Billing Under ASC 606 / IFRS 15What Are Contract Assets and Contract Liabilities? (In Simple Terms)

Under ASC 606 and IFRS 15, revenue is no longer about when you invoice or when you get paid.
It is about when you earn the revenue by delivering value.

To track this, accounting uses two concepts:

• Contract Asset
• Contract Liability

Think of them as timing differences between work done, billing, and payment.

Contract Asset — “We Earned It, But Haven’t Billed (or Collected) Yet”

Simple Meaning

A contract asset exists when:

• You have started delivering the product or service
• You have earned the right to revenue
• But you cannot yet invoice the customer (or invoicing depends on a future step)

Real-Life Analogy

You hire a contractor to renovate your kitchen:

• The work has started
• The contractor has earned part of the fee
• But the contract says the invoice can only be sent after a milestone

That unpaid, unbilled work is like a contract asset.

In Business Terms

“We have done our part of the deal, but we can’t bill yet.”

Contract Liability — “We Owe the Customer Future Service”

A contract liability means:

• The customer has a right to receive goods or services
• And the company has a present obligation to deliver
• Regardless of whether the customer has been billed or paid yet

Simple Analogy

You sign a contract with a consultant:

• Work is scheduled to start next month
• Payment terms say billing happens later
• The consultant is still obligated to deliver

That obligation exists even before invoicing.

Bottom Line

Contract liability is driven by obligation, not by billing or cash.

A contract liability exists when:

An entity has an obligation to transfer goods or services to a customer for which it has received consideration or for which consideration is due.

Key point:
👉 Billing or cash receipt is NOT a prerequisite.

This is explicitly stated in both standards.

A contract liability can arise even when:

• No invoice has been issued
• No cash has been received

As long as:

• The entity has an enforceable obligation to perform
• And the consideration is due or expected

When Contract Liability Can Arise (All Valid Cases)

Scenario	Contract Liability Exists?	Why
Customer paid in advance	✅ Yes	Obligation exists
Customer invoiced but unpaid	✅ Yes	Consideration is due
No invoice yet, but service committed	✅ Yes	Enforceable obligation
Invoice and payment both pending	✅ Yes	Performance obligation exists

Contrast With Contract Asset (Very Important)

Concept	Trigger
Contract Asset	Performance started / rights earned
Contract Liability	Obligation to perform exists

Neither depends strictly on:

• Billing
• Payment

One-Line, Fully Accurate Definition

• Contract Asset: We have earned the right to consideration by performing.
• Contract Liability: We have an obligation to perform, regardless of billing or payment.

Why This Matters in Revenue Systems

This distinction explains why:

• Contract liabilities can appear on Day 1 of a contract
• Before any invoice exists
• Before any cash is received

It also explains why Initial Performance Events can create contract liabilities independent of AR.