IFRS 15 addresses two types of contract costs: the incremental costs of obtaining a contract with a customer, and the costs incurred to fulfil it. An entity capitalises these costs as an asset when specified conditions are met, then amortises that asset on a systematic basis consistent with the pattern of transfer of the related goods or services to the customer.
Costs to Obtain a Contract
An entity recognises as an asset the incremental costs of obtaining a contract with a customer if it expects to recover those costs. The incremental costs of obtaining a contract are costs that the entity incurs to obtain the contract that it would not have incurred if the contract had not been obtained, such as a sales commission paid on a new deal.
A Practical Expedient for Short Amortisation Periods
As a practical expedient, an entity may recognise the incremental costs of obtaining a contract as an expense when incurred if the amortisation period of the asset that it otherwise would have recognised is one year or less — which exempts many short-term contracts from having to capitalise and gradually amortise sales commissions.
Costs to Fulfil a Contract
If the costs incurred to fulfil a contract with a customer are not within the scope of another Standard (such as the Standards on inventories, property, plant and equipment, or intangible assets), an entity recognises an asset from those costs only if all of the following criteria are met:
- The costs relate directly to an existing contract or a specifically identifiable anticipated contract.
- The costs generate or enhance resources of the entity that will be used in satisfying (or continuing to satisfy) performance obligations in the future.
- The costs are expected to be recovered.
Amortising the Resulting Asset
An entity amortises the asset recognised from costs to obtain or fulfil a contract on a systematic basis consistent with the transfer to the customer of the goods or services to which the asset relates, spreading the expense over the actual period of benefit from the contract rather than expensing it all at once when it arises.
Why the Distinction Between Expensing and Capitalising Matters
This distinction directly affects the timing of expense recognition related to obtaining and fulfilling contracts; capitalising costs and amortising them gradually spreads their effect on profit or loss across the periods over which the entity benefits from the contract, whereas immediate expensing loads the full cost onto a single period. An entity therefore typically documents the nature of each cost and how directly it relates to a specific contract before determining the appropriate treatment.
Legal References
- IFRS 15 — Revenue from Contracts with Customers, paragraph 91 (capitalising incremental costs of obtaining a contract).
- IFRS 15, paragraph 92 (definition of incremental costs of obtaining a contract).
- IFRS 15, paragraph 94 (practical expedient for amortisation periods of one year or less).
- IFRS 15, paragraph 95 (conditions for capitalising costs to fulfil a contract).
- IFRS 15, paragraph 99 (amortising the recognised asset).
For questions about your specific situation, you can ask the Accounting Helper (private sector) on Helpers, or consult a licensed chartered accountant.