CONTRACT ASSETS AND CONTRACT LIABILITIES
Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. The current portion of the contract assets are classified as current assets under the caption “Unbilled accounts receivable” while the noncurrent contract assets are classified as other assets under the caption "Other noncurrent assets" on the Consolidated Balance Sheets. Noncurrent contract assets were $121 million and $170 million at December 31, 2025 and 2024, respectively. Included in noncurrent contract assets are certain costs that are specifically related to a contract but do not directly contribute to the transfer of control of the tangible product being created, such as non-recurring engineering costs. The Company has elected to use the practical expedient and not consider unbilled amounts anticipated to be paid within one year as significant financing components.
Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract and advanced customer payments that are in excess of revenue recognized. The current portion of contract liabilities are classified as current liabilities under the caption “Customer deposits” while the noncurrent contract liabilities are classified as noncurrent liabilities under the caption "Other long-term liabilities" on the Consolidated Balance Sheets. Noncurrent contract liabilities were $259 million and $389 million at December 31, 2025 and 2024, respectively. These contract liabilities are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract or revenue associated with the contract liabilities is expected to be recognized within one year. Contract liabilities also include provisions for estimated losses from uncompleted contracts. Provisions for loss contracts were $82 million and $91 million at December 31, 2025 and 2024, respectively. These provisions for estimated losses are classified as current liabilities and included within the caption “Other accrued liabilities” on the Consolidated Balance Sheets.
The following table reconciles the changes in the Company’s contract assets and liabilities as follows: | | | | | | | | | | | | | | |
| | Contract Assets |
| In millions | | 2025 | | 2024 |
| Balance at beginning of year | | $ | 720 | | | $ | 678 | |
| Recognized in current year | | 811 | | | 856 | |
| Reclassified to accounts receivable | | (946) | | | (801) | |
| Acquisitions/adjustments | | — | | | 3 | |
| Foreign currency impact | | 23 | | | (16) | |
| Balance at end of year | | $ | 608 | | | $ | 720 | |
| | | | |
| | Contract Liabilities |
| In millions | | 2025 | | 2024 |
| Balance at beginning of year | | $ | 1,173 | | | $ | 1,082 | |
| Recognized in current year | | 1,659 | | | 1,562 | |
Amounts in beginning balance reclassified to net sales | | (554) | | | (572) | |
Current year amounts reclassified to net sales | | (958) | | | (876) | |
| Acquisitions | | 1 | | | 8 | |
| Foreign currency impact | | 35 | | | (31) | |
| Balance at end of year | | $ | 1,356 | | | $ | 1,173 | |
About Revenue Disclosures
Revenue disclosures under ASC 606 explain how a company identifies performance obligations, allocates transaction prices, and determines when revenue is recognized. This section is essential for understanding whether reported revenue reflects genuine economic activity or aggressive accounting choices. Analysts examine the mix of point-in-time versus over-time recognition, which directly affects revenue timing and comparability.
Key signals: rising contract liabilities (deferred revenue) suggest strong future revenue visibility, while declining contract assets may indicate slowing project milestones. Watch for variable consideration estimates — rebates, returns, and performance bonuses that require management judgment. Significant changes in disaggregated revenue by geography or product line can reveal shifting business mix before it appears in headline numbers. Compare revenue growth against contract liability growth to assess sustainability, and scrutinize any changes in the timing of recognition that coincide with earnings pressure.