The timing of when a reporting entity satisfies its performance obligation and when it invoices its customer can affect the presentation of assets and liabilities on the statement of financial position. An unconditional right to receive consideration often arises after a reporting entity transfers control of a good or service and invoices the customer, because receipt of payment is based only on the passage of time.
A reporting entity could, however, have an unconditional right to consideration before it has satisfied a performance obligation. For example, a reporting entity that enters into a noncancellable contract requiring advance payment could have an unconditional right to consideration before it performs under the contract. In other words, the right to invoice and collect from the customer is not contingent upon performance, even though the reporting entity may have to refund all or a portion of the payment to the customer if it ultimately does not perform according to the contract. A receivable is recorded in these situations with a corresponding credit to a contract liability (which may be referred to as deferred revenue); however, revenue is not recognized until the reporting entity has transferred control of the goods or services promised in the contract.
The fact that a reporting entity has issued an invoice does not necessarily mean it has an unconditional right to consideration. A reporting entity that invoices the customer cannot record a receivable unless it has concluded it has an unconditional right to consideration.
A reporting entity could, on the other hand, have an unconditional right to consideration before it invoices its customer, in which case the reporting entity should record an unbilled receivable. For example, this could occur if a reporting entity has satisfied its performance obligations, but has not yet issued the invoice.
In certain contracts, including certain commodity arrangements, the transaction price varies based on future changes in the market price that occur after the reporting entity has satisfied its performance obligations. A reporting entity might conclude it has an unconditional right to consideration (and therefore, should recognize a receivable subject to the financial instruments guidance) before the variability arising from changes in the market price is resolved.
Example FSP 33-6 and Example FSP 33-7 illustrate the interaction between the timing of invoicing, performance, and recording a receivable. This concept is also illustrated in Example 38 of the revenue standard (ASC 606-10-55-284 through ASC 606-10-55-286).
EXAMPLE FSP 33-6
Balance sheet presentation — recording a receivable
On January 1, Producer enters into a contract to deliver a product to Customer on March 31. The contract is noncancellable and requires Customer to make an advance payment of $5,000 on January 31. Customer does not pay the consideration until March 1.
How should Producer reflect the transaction in the statement of financial position?
Analysis
On January 31, Producer should record a receivable as Producer has an unconditional right to consideration:
Dr. Receivable | $5,000 | |
Cr. Contract liability | $5,000 |
On March 1, upon receipt of the cash, Producer should record the following:
Dr. Cash | $5,000 | |
Cr. Receivable | $5,000 |
On March 31, upon satisfying the performance obligation, Producer should recognize revenue as follows:
Dr.Contract liability | $5,000 | |
Cr.Revenue | $5,000 |
Producer has an unconditional right to the consideration when the advance payment is due because the contract is noncancellable. As a result,Producer records a receivable on January 31.
Producer would not record a receivable on January 31 if the contract were cancellable because, in that case, it does not have an unconditional right to the consideration. Producer would instead record the cash receipt and a contract liability on the date the advance payment is received.
EXAMPLE FSP 33-7
Balance sheet presentation — unbilled receivable
On January 1, Producer enters into a contract to deliver a product to Customer. Producer delivers the product on March 31 and sends an invoice for $5,000 to Customer on April 15. Customer pays the consideration on April 30. There are no other performance obligations in the contract.
How should Producer reflect the transaction in the statement of financial position?
Analysis
On March 31, upon satisfying the performance obligation, Producer would recognize revenue and record a receivable:
Dr.Receivable | $5,000 | |
Cr.Revenue | $5,000 |
On April 15, there would be no entry for Producer to record when it issues the invoice.
On April 30, upon receipt of the cash, Producer would record the following:
Dr. Cash | $5,000 | |
Cr.Receivable | $5,000 |
Producer has an unconditional right to the consideration after it delivers the product. As a result,Producer would record a receivable on March 31. The receivable is “unbilled” because Producer has not yet issued an invoice; however, the balance should be included with receivables (as opposed to contract assets) because it is an unconditional right to consideration.
