What is Contract Liability?
A contract liability under IFRS 15 is a company’s obligation to transfer goods or services to a customer for which the company has already received consideration. It is recognised on the balance sheet until the performance obligation is satisfied.
How It Works
- Identify each performance obligation in the contract.
- Track customer payments and compare them to the value of performance delivered.
- When cash received exceeds the value delivered, recognise a contract liability.
- Reduce the contract liability and recognise revenue as the performance obligation is satisfied.
- Disclose the contract liability balance and expected timing of revenue in the notes.
Saudi Context
Saudi telecom operators, construction contractors, and SaaS providers carry large contract liability balances under SOCPA-adopted IFRS 15. ZATCA expects revenue recognition timing in tax filings to match IFRS 15 treatment.
Example
A SaaS company collects SAR 120,000 in advance for a 12-month subscription. On day 1 it records SAR 120,000 of cash and SAR 120,000 of contract liability. After 6 months, SAR 60,000 has been recognised as revenue and SAR 60,000 remains as a contract liability.