Contract of Assets in Business

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Contract assets A supplier might transfer goods or services to a customer before the customer pays consideration or before payment is due.

In this case the contract is presented as a contract asset (excluding any amounts presented as a receivable).

A contract asset is a supplier’s right to consideration in exchange for goods or services that it has transferred to a customer. A contract asset is reclassified as a receivable when the supplier’s right to consideration becomes unconditional.

Contract liabilities A contract might require payment in advance or allow the supplier a right to an amount of consideration that is unconditional (i.e. a receivable), before it transfers a good or service to the customer. In these cases, the supplier presents the contract as a contract liability when the payment is made or the payment is due (whichever is earlier).

The contract liability is a supplier’s obligation to transfer goods or services to a customer for which it has received consideration (an amount of consideration is due) from the customer.

A person or company might act for another company. In this case the first company is said to be an agent of the second company and the second company is described as the principal.

An entity is a principal if it controls a promised good or service before it is transferred to a customer. However, an entity is not necessarily acting as a principal if it obtains legal title of a product just before legal title is transferred to a customer

 

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Bill and hold sales A bill-and-hold arrangement is a contract under which goods are sold to a customer but held at the selling entity’s premises until the customer requests delivery.

For example, a customer may request an entity to enter into such a contract because of the customer’s lack of available space for the product. Revenue for a bill-and-hold sale is recognised in the usual way, according to whether the customer has obtained control of the asset.

The selling entity needs to determine when it satisfies its performance obligation to transfer a product by evaluating when a customer obtains control of that product.

For some contracts, this could occur (and revenue be recognised) when the product is shipped from the selling entity’s site or delivered to the customer’s site depending on the terms of the contract.

However, a customer might have the ability to direct the use of, and obtain substantially all of the remaining benefits from, the product even though it has decided not to exercise its right to take physical possession of that product.

In this case the selling entity does not control the product. In this case, revenue would be recognised when the goods were originally sold

 

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For a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria must be met:

 the reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement);

 the product must be identified separately as belonging to the customer;

 the product currently must be ready for physical transfer to the customer; and

 the selling entity cannot have the ability to use the product or to direct it to another customer.

If the selling entity recognises revenue for the sale of a product on a bill-and-hold basis,

it should also consider whether it has remaining performance obligations.

For example, it might consider that it is providing a warehousing service to the customer. In such cases, the transaction price must be allocated between the goods sold and that service in the usual way