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Xiong 1991: Please tell me what contract assets and contract liabilities are, thank you!
Ma Jinghao: Okay, let me tell you, what are they!
What is a contract asset?
Contract assets are a further addition to the accounts receivable account under the new revenue standard, and according to Accounting Standard for Business Enterprises No. 14 - Revenue, contract assets refer to the right of an enterprise to receive consideration for the transfer of goods to customers, and this right depends on factors other than the passage of time. For example, if an enterprise sells two clearly distinguishable goods to a customer, and the contract stipulates that after the delivery of goods A, it cannot receive payment, and only after the delivery of goods B can it have the right to receive payment. The enterprise should treat the right to receive payment for commodity A as a contract asset.
Doesn't it seem like contract assets are a bit like accounts receivable? So, what is the difference between "contract assets" and "accounts receivable"?
To put it simply, "accounts receivable" represents the right of an enterprise to collect the contractually agreed payments from the customer unconditionally (i.e., only depending on the passage of time), and the only restriction is time, when the time passes until the other party pays. The right to receive money represented by a "contract asset" is also subject to conditions other than the passage of time. Generally speaking, the receivables can not be collected by waiting, but also by doing something else, and at this time they should be included in the contract assets. Therefore, in terms of asset quality, contract assets are weaker than accounts receivable.
In fact, the contract assets are used to improve the accounting of accounts receivable, and the accounts receivable that were previously placed in the accounts receivable pocket and meet certain conditions need to be taken out separately and put in the pocket of the contract assets. From a practical point of view, at present, the contract assets of most listed companies are 0 yuan, and in a few cases, a part of the accounts receivable can meet the recognition conditions of the contract assets, and can be taken out separately and put into the pocket of the contract assets. From a practical point of view, the general contract assets are smaller than the accounts receivable, or even significantly smaller than the accounts receivable.
Example 1: North China Pharmaceutical's balance in the pocket of accounts receivable at this point in January 1, 2018 is: 1.200 billion yuan, according to the definition of contract assets in the new standard, it is found that there is not a dime in the pocket that meets the recognition conditions of contract assets. Therefore, the balance of accounts receivable is unchanged, and the balance of contract assets is 0 yuan. In fact, until 2020, North China Pharmaceutical's financial report has not confirmed any contract assets.
Example 2: WuXi AppTec should have a balance of RMB 2.380 billion in its accounts receivable pocket at January 1, 2018, but after the implementation of the new standard adjustment, it needs to take out RMB 385 million (about 16.18%) separately and put it into the pocket of contract assets, leaving about RMB 1.995 billion (accounting for about 83.82%) in the pocket of accounts receivable.
Example 3: Investor question SZ300237: Excuse me, when will the contract assets be converted into income? Is there any bad debt?
The secretary of the board of directors replied: Dear investors, hello! In accordance with the new revenue standard, the company will show the amount of the company's performance obligations but not yet settled with customers as contract assets in the balance sheet. At present, no bad debts have been found, and if they occur in the future, the company will reflect them in the financial reports in a timely manner in accordance with accounting standards. Thank you for your interest!
Example 4: Investor question: What is the standard for confirming contract assets by (Chinasoft SH603927)? What is the difference between accounts receivable and accounts receivable?
The secretary of the board of directors replied: Dear investors, hello! Thank you for your interest. In accordance with the requirements of the "Accounting Standard for Business Enterprises No. 14 - Revenue" issued by the Ministry of Finance in July 2017, the Company implemented the new revenue standard on January 1, 2020, and the Company listed the contract consideration as contract assets in the balance sheet if the customer has not paid the contract consideration, but the company has fulfilled the performance obligation according to the contract and does not belong to the right to unconditionally collect money from the customer; However, if the customer has not paid the contract consideration and the company has fulfilled the performance obligation in accordance with the contract, it is an unconditional right to collect money from the customer, which is listed as accounts receivable in the balance sheet.
I would like to remind you that the accounts receivable and contract assets in the financial report include VAT. Therefore, a contract asset or accounts receivable generates a main business income and a tax payable at the same time.
Jingjing Baishan Tea: May I ask Mr. Ma, is the contract asset a statement item or an accounting subject? I am an infrastructure company, and the completed and unsettled projects have been put in inventory, and now they are let go of contract assets. Ma Jinghao: Contract assets are both statement items and accounting subjects, and for infrastructure enterprises, "contract assets" mainly refer to the completed and unsettled assets formed by construction contracts. In the past, it was accounted for in inventory, but now it is accounted for in contract assets. For example, the 2020 interim report of Robotics (SZ300024) company shows that 1.9 billion yuan of inventory has been turned into contract assets, which is the result of the company's reclassification of completed and unsettled assets formed by construction contracts in the original inventory to contract assets.
What is a contractual liability? Contract liabilities are a further addition to the original accounts receivable account under the new revenue standard, and the concepts of contract liabilities and advance accounts receivable are easily confused. If you distinguish between contract liabilities and advance receivables, you understand contract liabilities.
According to Accounting Standard for Business Enterprises No. 14 - Revenue, contractual liabilities refer to the obligation of an enterprise to transfer goods to customers for consideration received or receivable from customers. At first glance, contract liabilities and advance receivables are the same, both of which are received in advance by enterprises, but throughout the new revenue standard, an important element is emphasized "contract", if the payment received by an enterprise from customers constitutes a relationship between rights and obligations to be performed, then it needs to be accounted for through contract liabilities, otherwise it is accounted for through advance receivables. It should be noted that the recognition of contractual liabilities is not a precondition for the collection of payments.
The concept of "accounts receivable" does not emphasize the contract with the customer, and the consideration received before the contract is concluded cannot be called a contract liability, but can still be regarded as an advance receivable. Once the contract is formally formed, the advance receivables must be transferred to the contract liability.
In one sentence, it is distinguished: whether there is a contract or not, everything that has signed a contract belongs to the contract liability; Any money that has been received but has not been contracted or is not related to contractual obligations is considered an advance receipt. The similarity between the two is that the money is collected before the goods are provided, but the advance receivables only include the money that has been received, while the contractual liabilities also include the money that has not been received.
Doesn't it seem that the scope of contract liabilities is not only larger than that of pre-receivables, but it also seems that they are also coming to grab the share of pre-receivables. Most of the things that were previously placed in the pocket of advance receipts need to be taken out and put into the pocket of contract liabilities, and only a small part continues to remain in the pocket of advance receipts. From a practical point of view, the ability of contract liabilities to grab "advance receipts" is much stronger than the ability of contract assets to grab "accounts receivable", and the advance receipts are covered by contract liabilities on a large scale. Even many listed companies have robbed 100% of the advance receipts of their contract liabilities. In the future, even if there is an advance payment, it will be a sporadic amount.
Example 5: As a top real estate company in China, Vanke's sales revenue exceeded 600 billion yuan last year, why is the pre-collected accounts in the balance sheet liability account only a few hundred million? How do you deal with this account? How is it different from other real estate companies?
The secretary of the board of directors replied: Thank you for your attention. The company's pre-collected housing payment is placed in the contract liability account, and the balance at the end of 18 years has exceeded 500 billion yuan, and the pre-receivables account only includes the advance receipts generated by the business other than residential sales. Contract liabilities are an account used by the Company since the implementation of the new revenue standard in 2018.
Example 6: WuXi AppTec should have had a balance of RMB 604 million in advance receipts at this point in time on January 1, 2018, but after the implementation of the new standard adjustment, all of them need to be put into the pocket of contract liabilities, and the pocket of advance receipts will be empty. Since the implementation of the new accounting standards in 2018, WuXi AppTec's advance receipts account has been idle, all of which are 0 yuan.
From the perspective of accounting treatment, the basic accounting treatment of advance accounts receivable is almost completely covered by contract liabilities. However, one of the important differences is that, on the premise of the relevance of the performance obligation, when the advance payment has not been collected by the enterprise, if it can be determined that the enterprise has the right to collect the payment unconditionally, the enterprise should still recognize the contractual liability. The accounting treatment of such special circumstances is: "Debit: accounts receivable and notes receivable; credit: contract liabilities", and the accounts receivable account can only be recognized and measured after the consideration is actually received, and it is impossible to appear in practice "debit: accounts receivable and notes receivable; Credit: Accounts Received in Advance". The reason behind this is the difference in the scope of accounting between contract liabilities and advance receivables: contract liabilities can account for not only the actual receipts received, but also the advances that have not actually arrived but have the right to collect.
Although the contract liabilities seem to expand the accounting scope of the accounts receivable, and even the accounting entries of "debit: accounts receivable and notes receivable, credit: contract liabilities" can be prepared, it still cannot completely replace the accounts receivable in advance, because the contract liabilities must be based on the recognizability of the performance obligation as the premise, otherwise the amount collected first must be recognized as general advance receivables.
Explain the profound financial logic in concise language, such as the article is approved by you as a sign of encouragement. It is not easy to adhere to the original for a long time, I want to give up many times, persistence is a belief, focus is an attitude, accompany all the way, together with the heavens, thank you.
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