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Get clear answers on ASC 606 contract assets—what they are, how to recognize them, and best practices for accurate, compliant financial reporting.
If you’re still managing revenue recognition with spreadsheets, you know the pain of manual data entry and reconciliation. It’s slow, risky, and gets incredibly complex when you’re dealing with subscriptions or multi-stage projects. This is especially true when it comes to tracking ASC 606 contract assets. These conditional assets require careful management as they evolve over the contract lifecycle. This guide explains the fundamentals of contract assets and shows how a streamlined, automated approach can eliminate errors, save time, and give you a real-time view of your financials. Let's explore how to move beyond manual processes for better accuracy and efficiency.
Under ASC 606, revenue recognition isn't always as simple as sending an invoice after a job is done. Sometimes, you perform work for a customer, but your right to get paid depends on something more than just the passage of time. This is where the concept of a contract asset comes into play. Think of it as a placeholder on your balance sheet that represents the value of work you've completed but can't yet bill for. It’s a crucial piece of the puzzle for accurately reflecting your company's financial health, especially if you deal with long-term projects or complex customer agreements. Understanding this concept is the first step toward ensuring your books are compliant and tell the true story of your revenue.
At its heart, a contract asset is created when your company has delivered goods or services to a customer, but you don't have an unconditional right to payment yet. You've held up your end of the bargain by fulfilling a performance obligation, but some other condition must be met before you can send an invoice. For example, maybe you need to complete another phase of the project or wait for a customer's formal acceptance. This conditional right to payment is what distinguishes a contract asset from a standard accounts receivable, where the only condition for payment is the passage of time.
A contract asset arises from a specific situation: you've earned revenue by performing a service, but the contract prevents you from billing for it immediately. The key element is that your right to payment is tied to a future event other than the simple passing of time. This could be the completion of a subsequent project milestone, a successful system integration test, or receiving a third-party certification. This distinction is central to correctly presenting contract-related assets on your balance sheet. Once that condition is met, the contract asset is converted into an accounts receivable, and you can finally issue the invoice.
To identify a contract asset, ask yourself this simple question: "Have we completed work for a customer that we can't invoice for yet due to a specific condition in our contract?" If the answer is yes, you likely have a contract asset on your hands. These are especially common in industries with long-term, multi-stage projects, like construction, enterprise software, and telecommunications. For instance, a software company might recognize a contract asset after delivering a custom module but must wait for the client to complete user acceptance testing before it can bill for that work. Recognizing these situations is the first step to handling them correctly under ASC 606.
At first glance, contract assets and accounts receivable look similar—they both represent future cash for your business. But under ASC 606, they tell very different stories about your revenue. Getting this distinction right is key to accurate financial reporting and staying compliant. While both are assets on your balance sheet, understanding what separates them helps you present a clearer picture of your company’s financial health. Let's break down what sets them apart.
Think of accounts receivable (A/R) as a straightforward IOU. You’ve delivered your product or service, sent the invoice, and now you have an unconditional right to get paid. The only thing standing between you and the cash is the passage of time until the payment due date.
A contract asset is a bit more complex. It arises when you've completed part of your obligation to a customer but still have more to do before you can actually bill them. Your right to payment is conditional on finishing that future work. For example, if you’re building a website and get paid in two installments, you’d recognize a contract asset after completing the first phase, but you can't invoice until the whole project is done.
The moment you fulfill a performance obligation, you hit a fork in the road. You have to ask: Is my right to payment now unconditional? If the answer is yes, and all you need to do is wait for the customer to pay, you can record an account receivable. This is the most common scenario for businesses that deliver a product or service and then send an invoice.
If the answer is no—because your payment depends on delivering another good or service—you'll record a contract asset instead. This asset stays on your books until that condition is met. Once you complete the final step, the contract asset then flips over and becomes an account receivable, ready for invoicing.
Separating these two items on your balance sheet gives a clearer picture of your financial health. A contract asset carries more risk than a receivable because it’s tied to future performance. What if you can't complete the remaining work? A receivable, on the other hand, primarily carries credit risk—the chance the customer might not pay.
Both are typically listed under current assets, but they appear on separate lines. This transparency helps investors and lenders understand the nature of your future revenue. For more complex financial pictures, digging into these kinds of accounting insights is essential for making smart business decisions and ensuring your reporting is accurate.
Knowing when to recognize a contract asset is just as important as knowing what one is. Timing is everything in accounting, and ASC 606 has specific rules to guide you. It’s not just about when you do the work or when you send an invoice; it’s about the nature of your right to get paid. Think of it as a sequence of events. You first have to deliver on your promise to the customer. Only then can you determine if you have a straightforward receivable or a more nuanced contract asset on your hands. Let's walk through the key moments and conditions that tell you it's time to record a contract asset on your books.
The starting point for recognizing a contract asset is fulfilling a performance obligation. In simple terms, you’ve done some or all of the work you promised. A contract asset is created when you deliver goods or services to a customer, but you don't have an unconditional right to payment yet. Imagine you’re a software company with a contract to deliver two custom modules. You’ve delivered the first module, but the contract states you can only invoice the client after both are complete. You’ve earned the revenue for that first module, but your right to payment is still conditional. This is the exact scenario where you would recognize a contract asset on your balance sheet.
The distinction between a contract asset and an accounts receivable all comes down to one word: conditional. A right to payment is conditional if something other than the passage of time must occur before you can collect your money. This "something" could be completing another project milestone, delivering a final report, or waiting for a specific event to happen. If your right to payment is only dependent on time passing (like with standard Net 30 terms), you have an accounts receivable. But if you still have more work to do before you can send that invoice, your right is conditional, and you’re dealing with a contract asset.
So, how do you put this into practice? Think of it as a simple, two-step checklist. First, have you satisfied a performance obligation by transferring goods or services to your customer? If the answer is no, then you can’t recognize anything yet. If the answer is yes, move to the second question: Is your right to payment for that performance unconditional? If it’s unconditional (meaning only the passage of time is required), you record an accounts receivable. If it’s conditional on a future event or performance, you record a contract asset. Using an automated revenue recognition system helps ensure this logic is applied consistently across all your contracts.
Recognizing a contract asset isn't a "set it and forget it" activity. ASC 606 also requires you to consider factors that could change the asset's value over time, particularly the risk of non-payment. This means you must regularly assess your contract assets for impairment or potential credit losses. You need to evaluate whether the customer is likely to pay the full amount once all conditions are met. This assessment is crucial for keeping your financial statements accurate and compliant. It adds a layer of complexity, but it’s a vital part of managing the entire lifecycle of a contract asset and reflecting the true economic value of your contracts.
Once you’ve identified a contract asset, the work isn’t over. You need a solid plan for measuring its value and managing it over time. Think of it as a living part of your financials—it will change as you complete more work and as time passes. Proper management is key to keeping your books accurate and compliant with ASC 606. It involves calculating the initial value, reassessing it as conditions change, and keeping an eye out for potential risks, like a customer not being able to pay.
Getting this right requires a clear process. You’ll need to determine how to value the asset from day one, what to do when it eventually converts to a receivable, and how to handle potential losses. For businesses with many contracts, especially those dealing with subscriptions or multiple currencies, this can get complicated fast. Having a system in place to track these moving parts is essential for accurate financial reporting and making smart business decisions. Let’s walk through the key steps for measuring and managing your contract assets effectively.
Your initial measurement of a contract asset is straightforward: it’s equal to the value of the work you’ve completed for which you don’t yet have an unconditional right to payment. A contract asset is recorded when you've delivered a good or service, but some condition other than the passage of time must be met before you can bill the customer. The value you record should reflect the transaction price allocated to the specific performance obligations you’ve fulfilled. This ensures your financial statements accurately represent the economic value you’ve provided to your customer, even before an invoice is sent.
A contract asset doesn’t stay a contract asset forever. Its value should be reassessed regularly as you continue to fulfill your end of the bargain. As you complete more work or meet other contractual conditions, the asset's value might increase. The ultimate goal is for the contract asset to convert into an accounts receivable. This happens the moment your right to payment becomes unconditional—meaning, only the passage of time stands between you and getting paid. Tracking this conversion is crucial for maintaining an accurate balance sheet and understanding your cash flow timeline.
Just like with accounts receivable, you have to consider the possibility that a customer might not pay. This is known as impairment or assessing for credit losses. Under ASC 606, you are required to regularly review your contract assets to see if their value has decreased because of a customer's credit risk. If you determine that a portion of the contract asset is unlikely to be collected, you must record an impairment loss. This adjustment ensures your assets aren’t overstated on the balance sheet and gives a more realistic picture of your company’s financial health.
Contract assets carry more than just credit risk. They also involve performance risk—the chance that you might not fulfill the remaining obligations in the contract. To manage these risks, start with crystal-clear contract terms that outline all deliverables and payment milestones. Maintaining open communication with your clients can also help you spot potential issues early. From a financial perspective, having a clear view of all your contract data in one place allows you to better understand the risks across your entire portfolio and make proactive decisions.
If your business operates globally, you’re likely dealing with contracts in multiple currencies. This adds another layer of complexity to managing contract assets. You have to account for fluctuations in exchange rates from the time you recognize the asset to when you eventually receive payment. Manually tracking these changes for every contract is not only time-consuming but also prone to error. Using a robust, automated system is the most effective way to manage subscription business challenges like multi-currency transactions. It streamlines the entire process and ensures your revenue is recognized accurately, no matter where your customers are.
Once you’ve identified and measured your contract assets, the next step is to present them correctly on your financial statements. This isn’t just about following the rules; it’s about providing a clear and accurate picture of your company’s financial health to investors, lenders, and other stakeholders. Proper presentation ensures transparency and helps everyone understand how and when your company earns its revenue. Getting this right builds trust and is a cornerstone of solid financial reporting under ASC 606.
Think of your financial statements as the story of your business. Contract assets are a key character in that story, representing the value you’ve delivered but can't yet invoice. How you introduce and explain this character affects the entire plot. Let’s walk through exactly where these assets show up and what you need to say about them.
On your balance sheet, contract assets need their own dedicated space. It’s crucial to list them separately from accounts receivable. Why the distinction? Because they represent two different rights. Accounts receivable is your unconditional right to payment—the invoice is sent, and you’re just waiting for the cash. A contract asset, however, is a conditional right. You’ve done the work, but something else has to happen before you can bill the client. Separating them gives a clearer view of your assets and the timing of your future cash flows, which is exactly what stakeholders want to see.
The moment you record a contract asset on your balance sheet, you must also record the corresponding revenue on your income statement. This is a fundamental part of ASC 606. It ensures that your revenue recognition is perfectly aligned with the value you’ve delivered to the customer. This simultaneous entry shows that you have fulfilled a performance obligation and earned the revenue, even if you haven’t sent an invoice yet. Using an automated system helps ensure this happens accurately every time, preventing mismatches between your balance sheet and income statement and keeping your financials audit-ready.
Transparency is non-negotiable when it comes to contract assets. In the notes of your financial statements, you need to provide clear, detailed explanations. This isn't the place to be vague. You should describe the nature of your contract assets, including what services were performed but not yet billed. You also need to disclose any significant changes in the asset's value from one period to the next and explain when you expect those assets to be reclassified as receivables. This level of detail gives investors the context they need to truly understand your revenue cycle.
Solid documentation is the bedrock of compliant financial reporting. For every contract asset, you need to maintain a clear audit trail. This means keeping thorough records of the original contracts, any amendments or modifications, and the key judgments you made when recognizing and measuring the asset. This documentation is your proof during an audit. Centralizing this information is key, which is why having seamless integrations between your CRM, billing, and accounting software is so important. It ensures all your data is consistent and easily accessible when you need it.
If you’re managing contract assets manually, you know the process can be tedious and prone to error. Juggling spreadsheets, reconciling data from different systems, and keeping up with ASC 606 rules takes time away from focusing on your business. Automating contract asset management isn't just a convenience; it's a strategic move that brings accuracy, efficiency, and clarity to your financial operations.
By automating, you create a reliable system that reduces the risk of human error, ensures compliance, and gives you a real-time view of your financial health. It frees up your team to focus on analysis and strategy instead of getting bogged down in manual data entry. Let’s look at a few key reasons why making the switch is a game-changer.
Your business data probably lives in several different places—your CRM, your billing platform, and your ERP. Without automation, you’re left manually pulling information from each source to piece together the full picture. This is not only time-consuming but also opens the door for costly mistakes. A modern ASC 606 solution should integrate seamlessly with your existing tech stack. This creates a connected ecosystem where data flows automatically, ensuring that all relevant information is captured and processed efficiently without manual intervention.
For Controllers and revenue teams, maintaining data continuity across separate systems is a major challenge. When information doesn't flow smoothly, you end up with discrepancies that can compromise your financial accuracy and compliance. Automation solves this by creating a single source of truth for your contract data. It ensures that every contract modification, payment, and performance obligation is tracked consistently across all platforms. This eliminates data silos and gives you confidence that your financial statements are always accurate and audit-ready.
How long does it take you to get a clear picture of your revenue and contract assets? If you’re waiting until the end of the month, you’re making decisions with outdated information. Automated revenue recognition tools can process data from different sources to provide real-time analytics. This means you can see exactly where you stand at any moment. This immediate visibility empowers you to spot trends, forecast more accurately, and make informed strategic decisions that drive growth.
Subscription-based businesses are constantly changing, with customers upgrading, downgrading, or adding new services. Managing these modifications manually under ASC 606 is incredibly complex. Automated systems handle these changes effortlessly by using dynamic segmentation. This allows you to group contracts and performance obligations based on specific, evolving criteria. As your business needs change, your system adapts, ensuring revenue is always recognized correctly without requiring a manual overhaul of your processes.
Managing contract assets under ASC 606 isn't just about getting the initial accounting right; it's about maintaining accuracy and compliance over the long haul. Think of it as financial housekeeping. Without a solid system in place, things can get messy fast, leading to inaccurate financial statements and a headache during audit season. The key is to build a framework that supports ongoing compliance. This involves establishing strong internal controls, leveraging automation to minimize errors, actively monitoring your assets, and conducting regular reviews to ensure everything stays on track. By focusing on these four areas, you can create a reliable, auditable process that not only keeps you compliant but also provides a clearer picture of your company's financial health. It’s about turning a complex accounting requirement into a streamlined, manageable part of your financial operations.
Strong internal controls are the foundation of your compliance strategy. They are the specific rules and procedures you put in place to protect your assets and ensure your financial data is reliable. A major challenge for many finance teams is maintaining data continuity across different systems, like your CRM and your accounting software. To tackle this, start by documenting a clear, step-by-step process for how your team recognizes and measures contract assets. Define who is responsible for each step and implement checks and balances to catch errors. Standardizing how data is entered and managed across all platforms is crucial for creating a single source of truth and preventing costly discrepancies down the line.
Let’s be honest: manual data entry and calculations are tedious and prone to human error. When you’re dealing with the complexities of ASC 606, especially in a high-volume business, a small mistake can have a big impact. This is where automation becomes your best friend. Implementing a robust automated system helps you manage everything from subscription changes and cancellations to multi-currency transactions with precision. An Automated Revenue Recognition solution applies the rules of ASC 606 consistently every time, streamlining the entire process. This not only ensures accuracy but also frees up your team to focus on more strategic analysis instead of getting bogged down in spreadsheets.
Compliance isn't a one-and-done task. You need to actively monitor your contract assets to account for any changes or potential impairments. The most effective way to do this is with a system that offers real-time analytics and dynamic segmentation. When your revenue recognition software integrates seamlessly with your ERP, CRM, and billing systems, you gain a complete, up-to-the-minute view of your financial data. This allows you to use dashboards and reports to track the status of your contract assets continuously. With this level of visibility, you can spot potential issues early and address them before they become significant problems, keeping your financials accurate and reliable.
Finally, establishing a routine for regular reviews makes your entire process repeatable, auditable, and efficient. This isn't just about checking for errors; it's about proactively managing your financial health. Set a schedule—whether it's monthly or quarterly—to review your contract asset balances, reassess them for impairment, and evaluate the effectiveness of your internal controls. This systematic approach ensures that your accounting practices evolve with your business and remain compliant with ASC 606 standards. It also means that when it’s time for an audit, you’ll have a well-documented and organized trail, making the entire experience much smoother for everyone involved. For more tips, you can find additional insights on our blog.
Managing contract assets effectively isn't just about following the rules; it's about creating a reliable system that supports your business's financial health. When you have a solid framework in place, you can be confident in your financial statements, pass audits with ease, and make smarter strategic decisions. It all comes down to being proactive and organized. By establishing clear guidelines and consistently reviewing your process, you turn a complex accounting requirement into a streamlined part of your operations. Here are five best practices to help you get there.
Your first step is to create a clear and accessible set of rules for how your company handles contract assets. Think of this as your playbook. It should outline exactly how to identify, measure, and report on these assets according to ASC 606. Don't just write it and file it away; make it a living document that you update as your business or regulations change. Your policies should be straightforward enough for anyone on your finance team to understand and apply consistently. This clarity eliminates guesswork and ensures everyone is on the same page, which is fundamental to maintaining accurate revenue recognition.
A great policy is only effective if your team knows how to use it. Training is essential, and it shouldn't be a one-time event. Hold regular sessions to keep everyone updated on your procedures and any changes to ASC 606. It’s also smart to get your sales, legal, and finance teams in the same room. When everyone who touches a customer contract understands the financial implications, you can prevent issues before they start. Make sure to document everything and create a central resource where team members can find answers and review contract terms, ensuring a smooth and collaborative process.
Under ASC 606, you have to regularly check your contract assets for potential "credit losses"—which is the accounting term for the risk that a customer might not pay what they owe. This isn't just a formality; it's a crucial step in presenting an accurate picture of your company's financial position. You'll need to evaluate factors like a customer's payment history, their financial stability, and broader economic conditions. This ongoing assessment for impairment ensures your balance sheet doesn't overstate the value of your assets, giving you a more realistic view of your financial health.
Think of quality control as your safety net. It’s a system of checks and balances designed to catch errors and ensure your data is accurate. Auditors pay very close attention to how you calculate estimates and the strength of your internal controls, so this is an area you can't afford to overlook. Simple measures like separating duties—so the person recording the asset isn't the same person approving it—and performing regular reconciliations can make a huge difference. Automating these processes with tools that integrate with your existing systems can also add a powerful layer of quality control, reducing manual errors and saving time.
Finally, managing contract assets is not a "set it and forget it" task. The best approach is one of continuous improvement. Regularly review your processes, policies, and controls to see what’s working and what could be better. Are your reports giving you the insights you need? Is your team able to follow the policies easily? By constantly refining your approach, you can adapt to changes in your business and stay ahead of compliance requirements. An automated system can provide the data you need to make these improvements, giving you the visibility to fine-tune your strategy. If you're ready to build a more efficient process, you can always schedule a demo to see how.
Putting ASC 606 principles into practice isn't always a walk in the park. Many finance teams run into similar roadblocks, from wrestling with messy data to keeping up with complex rules. The good news is that these challenges are completely solvable. It’s not about having a perfect system from day one, but about understanding the common pitfalls and having a clear strategy to address them.
Think of it this way: your financial data tells a story about your business. When different systems aren't talking to each other, you get disjointed chapters instead of a cohesive narrative. This can lead to inaccurate revenue reporting and a lot of manual cleanup. Likewise, if you're dealing with complex contracts or subscriptions, trying to manage them on spreadsheets is a recipe for headaches. The key is to move from reactive problem-solving to a proactive, streamlined approach. Let's break down some of the most frequent hurdles and talk through practical ways to clear them, so you can spend less time untangling data and more time making strategic decisions.
One of the biggest frustrations for finance teams is dealing with data that lives in different, disconnected systems. Your CRM has the contract details, your billing platform has the payment information, and your ERP holds the general ledger. When these systems don't communicate, your team is left to manually stitch everything together. This process is not only slow but also incredibly prone to error. A single typo can throw off your revenue numbers and create a nightmare during an audit.
The solution is to create a single source of truth. Modern ASC 606 solutions are designed to integrate seamlessly with the tools you already use. By connecting your ERP, CRM, and billing systems, you ensure data flows automatically and accurately. This eliminates the need for manual data entry, reduces the risk of errors, and gives you a complete, real-time view of your revenue streams.
If your business handles subscriptions, usage-based billing, or contracts with multiple performance obligations, you know how complicated revenue recognition can get. Manually tracking changes, cancellations, mid-cycle upgrades, and multi-currency transactions is a massive undertaking. Each modification requires a new calculation, and the more complex your offerings, the higher the chance of something falling through the cracks. This complexity makes it difficult to close the books quickly and confidently.
Automated systems are built to handle this kind of complexity with ease. Instead of manually recalculating revenue for every subscription change, a robust platform can manage these adjustments automatically. This streamlines the entire process, from initial recognition to ongoing management. By automating these workflows, you can ensure revenue is recognized correctly and consistently, no matter how intricate your business model becomes.
ASC 606 isn't a "set it and forget it" standard. The rules are nuanced, and ensuring ongoing compliance requires diligence. For many teams, the primary challenge is maintaining data continuity and accuracy across all their financial systems. Without a centralized way to manage revenue, it's tough to prove that you're following the five-step model correctly for every single contract. This can create significant risk and add a lot of stress during audit season.
The most effective way to stay compliant is to use software designed specifically for revenue recognition. These tools have the ASC 606 framework built into their logic, which simplifies the process and reduces the burden on your team. By leaning on a system that enforces compliance, you can minimize manual work, ensure accuracy, and feel confident that your financial statements are audit-ready. It’s about having a partner that understands the intricacies of compliance so you don't have to be the sole expert.
Switching from manual spreadsheets to an automated system is more than just a technical upgrade—it's a fundamental shift in your financial operations. The transition can feel daunting, and many teams worry about the disruption it might cause. The biggest hurdle isn't learning the new software; it's redesigning your internal processes to be more efficient, repeatable, and auditable. This change requires careful planning and clear communication across your team.
To make the transition smooth, approach it as a strategic project, not just an IT task. Start by mapping out your current revenue processes to identify bottlenecks and areas for improvement. Then, work with a partner who can guide you through the implementation and help you configure the system to fit your specific needs. Transforming your financial treatment of revenue is a significant step, but with the right support, you can build a better process that sets your business up for scalable growth.
What's the simplest way to think about the difference between a contract asset and accounts receivable? Think of it like this: Accounts receivable is a straightforward IOU. You've done the work, sent the invoice, and now you're just waiting for the payment period to pass. A contract asset is more like an IOU with a condition attached. You've done some of the work, but you can't send the invoice until you complete another step, like finishing the next phase of a project. The moment that condition is met, the contract asset becomes a standard accounts receivable.
What happens if a customer contract changes after I've already recorded a contract asset? Contract modifications are a common part of business, especially with subscriptions or long-term projects. When a contract changes, you have to reassess the value of your contract asset. This could mean adjusting its value up or down based on the new terms. This is a key reason why managing these on a spreadsheet is so risky; a manual update can easily be missed. An automated system handles these modifications seamlessly, ensuring your financials always reflect the most current state of the agreement.
Is having a lot of contract assets on my balance sheet a good or bad sign? It's not inherently good or bad, but it does tell a specific story about your business model. A high balance of contract assets often indicates that you're involved in long-term projects where you perform work well before you can bill for it. While it shows you have future revenue in the pipeline, it also signals a potential cash flow lag and performance risk. The key is to manage these assets effectively and have a clear understanding of when they will convert to cash.
Can I have both a contract asset and a contract liability on the same contract? Yes, it's entirely possible, especially with complex, long-term agreements. You might have a contract asset because you've completed one phase of a project but can't bill for it yet. At the same time, you could have a contract liability if the customer paid you upfront for a different part of the project that you haven't started. The two are presented separately on the balance sheet because they represent different obligations and rights related to the same customer agreement.
How does managing contract assets manually put my business at risk? Relying on spreadsheets for contract asset management opens the door to significant risks. Manual data entry is prone to human error, which can lead to inaccurate financial statements and serious compliance issues during an audit. It also creates data silos, as the information in your spreadsheet may not match what's in your CRM or billing system. This lack of a single source of truth makes it incredibly difficult to get a real-time view of your financial health, forcing you to make strategic decisions based on outdated or incorrect information.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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