ECL on contract assets

What is a contract asset?

Under IFRS 15, a contract asset is a right to consideration in exchange for goods or services transferred, when that right is conditional on something other than the passage of time, such as completing a milestone. Once the right becomes unconditional, it becomes a receivable. Unbilled revenue on long-term contracts, and accrued revenue in telecom and utility businesses, are common examples.

ECL on contract assets: how does it compare with receivables?

An example: a construction contract

A contractor has a contract asset of 2,000,000 for work completed but not yet certified, and a receivable of 500,000 from the same customer for work already billed. The customer is a mid-sized developer.

For a single large contract with one customer, the customer-specific approach is more appropriate, because the provision matrix reflects an average of many smaller customers. The contractor uses 30,000 and applies the same customer assessment to the 500,000 receivable.

Why is performance risk excluded?

The risk that the company does not complete the work, or that the customer disputes quality, affects the amount of revenue under IFRS 15, through variable consideration and the measure of progress, not the ECL. Including it in the allowance would double count it or put it in the wrong place. The ECL covers only the risk that the customer cannot pay what it owes.

How does a contract asset become a receivable?

When the condition is met, such as a milestone being certified, the right to payment becomes unconditional, and the amount is reclassified from contract asset to receivable. Its ECL allowance moves with it and is then measured using the receivables method. In the disclosures, the movement is shown as a transfer between the two balances, not as a new asset.

How do telecom and utility companies treat accrued revenue?

Services used but not yet billed at the period end, often called accrued or unbilled revenue, are usually receivables rather than contract assets if only the passage of time stands between them and billing. Either way they carry ECL, typically at the current bucket's rate, because the same customers will receive and pay the bills.

What is the lifetime of a contract asset?

The expected period until the contract asset is billed and then collected. A contract asset that will be invoiced at the next milestone in three months and paid 60 days later has a lifetime of about five months, which keeps the ECL modest even under the simplified approach.

What about US GAAP?

Under CECL, contract assets are also in scope, and ASU 2025-05 allows the practical expedient for current contract assets: entities may assume that conditions at the balance sheet date do not change over the asset's remaining life. See CECL for trade receivables.

What are common mistakes?

• Leaving contract assets out of the ECL calculation entirely.
• Applying an overdue bucket's loss rate to unbilled amounts, overstating ECL.
• Mixing customer disputes and contract losses into the credit loss allowance.

See also simplified vs general approach, the provision matrix and revenue over time.

This guide is general information. It is not tax or legal advice for your situation.