ASC 606 Contract Asset Disclosures: What You Need to Know
The Financial Accounting Standards Board (FASB) has issued Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, which aims to improve revenue recognition practices across different industries. One of the key changes brought about by ASC 606 is the introduction of contract assets and liabilities.
In this article, we will focus on contract assets and the associated disclosures that companies need to provide under ASC 606.
What are Contract Assets?
A contract asset is an asset recognized when a company has transferred goods or services to a customer, but has not yet received payment. In other words, it is an amount that a company expects to receive from a customer for work already completed or goods already delivered.
This differs from accounts receivable, which is a similar concept, but represents amounts that a company expects to receive from customers for work or goods that have not yet been delivered or completed.
Under ASC 606, companies are required to recognize contract assets when they have the right to receive payment for goods or services that are partially or fully completed, and when the payment is not yet due.
Disclosures Required under ASC 606
ASC 606 requires companies to provide several disclosures related to contract assets. These disclosures are intended to provide investors and other stakeholders with information about the nature, amount, timing, and uncertainty of revenue and cash flows related to contract assets.
Some of the key disclosures required include:
1. Contract asset balances: Companies must disclose the opening and closing balances of contract assets, as well as any changes in those balances during the reporting period.
2. Expected timing of payment: Companies must provide information about the expected timing of when they expect to receive payment for contract assets. This information could include the expected payment date, the payment terms, and any discounts or penalties for late payment.
3. Contract asset impairments: When a company determines that it is unlikely to collect amounts due on a contract asset, it must recognize an impairment loss. Companies are required to disclose any impairment losses recognized during the reporting period, as well as any reversals of previous impairment losses.
4. Other factors affecting contract assets: Companies must provide information about any other factors that may affect the collectability of contract assets. For example, changes in the financial condition of customers, changes in market conditions, or disputes with customers could all impact the collectability of contract assets.
ASC 606 introduces several changes to how companies recognize revenue, including the introduction of contract assets and liabilities. Companies must be aware of the new disclosure requirements related to contract assets and ensure that they are providing sufficient information to investors and other stakeholders. Failure to provide accurate and complete disclosures could result in regulatory scrutiny and potential legal action. As a copy editor, it is important to ensure that any articles related to ASC 606 and contract asset disclosures accurately reflect the requirements and provide clear and concise information to readers.