Contract liability
When a customer pays, or an unconditional payment becomes due, before the entity transfers the promised goods or services, the entity presents a contract liability. It is released as the relevant performance obligation is satisfied and revenue is recognised. A refund liability, which represents an expected repayment rather than an obligation to transfer the promised goods or services, is assessed separately. Review the contract terms and distinguish the liability from income already earned.
Worked example
A customer pays 1,200 in advance for 12 months of support. Before service begins, the entity has a 1,200 contract liability. If service is transferred evenly, after three months it recognises 300 revenue and the remaining contract liability is 900.
Common mistake
Recognising all cash received as revenue immediately, or assuming the amount due must actually have been paid before a contract liability can arise.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |