In short
A contract liability is a company's obligation to transfer goods or services to a customer for which it has already received payment (or the payment is due). It is often called deferred or unearned revenue.
Key takeaways
- It becomes revenue as the related performance obligation is satisfied.
- The opposite position, where the company has performed but its right to payment is still conditional, is a contract asset.
- An unconditional right to payment is a receivable, not a contract asset.
Example
A customer prepays $24,000 on October 1 for a year of service. At December 31, $6,000 is revenue and $18,000 is a contract liability.
Where it's tested
FAR: Revenue Recognition — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company receives $50,000 cash on December 1 for services to be provided evenly over the following ten months. What is reported at December 31?