Costs to obtain and to fulfil a contract

Learning objectives

• Determine whether a cost of obtaining a contract is incremental (it would not have been incurred if the contract had not been obtained) and is therefore recognised as an asset if it is recoverable, with the practical expedient for an amortisation period of one year or less.L2, L3
• Determine whether a cost to fulfil a contract that is not within the scope of another standard is recognised as an asset (relating directly to an identified contract, generating resources that will be used in satisfying future obligations, recoverable) or as an expense.L2, L3
• Record the capitalisation of a cost of obtaining a contract.L2

Normative references

• IFRS 15 §91The entity recognises as an asset the incremental costs of obtaining a contract with a customer if it expects to recover those costs.
• IFRS 15 §92Incremental costs are those that the entity would not have incurred if the contract had not been obtained; a sales commission is the typical example.
• IFRS 15 §93Costs of obtaining a contract that would have been incurred regardless of whether the contract was obtained are recognised as an expense when incurred, unless they are explicitly chargeable to the customer regardless of whether the contract is obtained.
• IFRS 15 §94As a practical expedient, the entity may recognise the incremental costs of obtaining a contract as an expense when incurred if the amortisation period of the asset that would otherwise have been recognised is one year or less.
• IFRS 15 §95When the costs incurred in fulfilling a contract are not within the scope of another standard, the entity recognises them as an asset only if three cumulative conditions are met: they relate directly to an existing contract or a specifically identified anticipated contract, they generate or enhance resources that will be used in satisfying future performance obligations, and they are expected to be recovered.
• IFRS 15Costs incurred in fulfilling a contract that are within the scope of another standard (for example inventories, property, plant and equipment or intangible assets) are accounted for in accordance with that other standard and not IFRS 15.
• IFRS 15 §97Costs that relate directly to a contract include in particular direct labour, direct materials, allocations of costs that relate directly to the contract or to contract activities (management, supervision, insurance, depreciation of tools), costs that are explicitly chargeable to the customer and other costs incurred only because the entity entered into the contract.
• IFRS 15The following are recognised as expenses when incurred: general and administrative costs not explicitly chargeable to the customer, costs of wasted resources not reflected in the contract price, costs relating to performance obligations already satisfied (in whole or in part), and costs for which the entity cannot distinguish whether they relate to satisfied or unsatisfied obligations.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

19 questions

• Orbis pays its salesperson a commission of 4,000 that is due only if the 3-year maintenance contract with a customer is signed. Orbis expects to recover this cost through the contract margins. The commission is recognised as an asset.L2
• To respond to a tender, Verdance incurs 7,000 of lawyer's fees for drafting its proposal; these fees are due whether or not the contract is won and cannot be recharged to the customer. Verdance wins the contract: it must recognise these fees as an asset.L2
• 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 would otherwise have been recognised is one year or less.L3
• Fabrinox manufactures parts for a customer under contract; the costs of the parts held in inventory fall within IAS 2. Fabrinox must nevertheless apply the three IFRS 15 criteria for recognising costs to fulfil a contract as an asset to those costs.L3
• Pixelia, a communications agency, is analysing the costs related to signing a one-year contract with a customer. Which one is an incremental cost of obtaining the contract?L2
• Before a remote monitoring contract starts, Hélionet sets up the platform that will be used to provide the service. Which of the following costs must be recognised as an expense when incurred, whatever the analysis of the other criteria?L2
• Costs to fulfil a contract that are not within the scope of any other standard are recognised as an asset under IFRS 15. Which conditions must be met?L3
• Ondéo Services is performing an IT outsourcing contract. Which of the following costs must be recognised as an expense when incurred?L3
• Datavia signs a 3-year maintenance contract with a customer worth {contract_value}. It pays its salesperson a commission of {commission_rate} of the value of contracts signed. Before signing, it incurred external legal fees of {legal_fees} and travel costs of {travel_costs}, which would have been incurred even without obtaining the contract. Datavia expects to recover its costs and does not apply the practical expedient. What amount does it recognise as an asset for the costs of obtaining the contract?L2
• Telecoms operator Nordis Télécom wins a 4-year connectivity contract with a hotel chain for total consideration of {total_consideration}. An independent business introducer receives {agent_rate} of that consideration, payable only because the contract is concluded. Nordis also paid {bid_consultant_fee} to a consultant to prepare its bid, due whatever the outcome, and the fixed salary of its sales manager for the negotiation month amounts to {sales_manager_salary}. Recovery of the costs is expected. What amount does Nordis recognise as an asset?L3
• Cloudéa signs a 5-year managed hosting contract. Before the service starts, it carries out set-up work on its own platform that transfers no service to the customer but creates resources that will be used to provide the hosting (facts of the case); these costs are not within the scope of any other standard and are expected to be recovered. Costs incurred: labour of engineers assigned to the contract {direct_labour}; allocation of supervision relating directly to the contract {supervision}; head office administrative costs not chargeable {general_admin}; rework of a faulty configuration, waste not reflected in the price {wasted_costs}. What amount does Cloudéa recognise as an asset?L3
• Logistics provider Logifret enters into a 6-year warehousing contract with a retailer. To prepare its warehouses, it incurs: set-up labour {setup_labour}; consumables used directly for the set-up {consumables}; an insurance premium taken out for this contract only {contract_insurance}; purchase of racking, property, plant and equipment accounted for under IAS 16, {racking}; non-chargeable overheads {overheads}. The set-up transfers no service to the customer, creates resources used for future services and its cost is recoverable (facts of the case). What amount does Logifret recognise as an asset for costs to fulfil the contract under IFRS 15?L3
• Training provider Altiplan Formation signs a 2-year training contract on 1 March 20X1 for {contract_price}. It owes an independent broker a commission of {commission}, due solely because of the signing and payable the following month. Altiplan expects to recover this cost and does not apply the practical expedient. Record the entry on 1 March 20X1.L2
• Vélia Sécurité concludes a 3-year security services contract worth {contract_value}. It immediately pays its saleswoman, by bank transfer, a bonus of {bonus_rate} of that value, due solely because of the signing. Vélia expects to recover this cost; as the amortisation period exceeds one year, the practical expedient is not applicable. Record the entry for the bonus.L2
• Rapidéco signs a 9-month event organisation contract and pays its salesperson a commission of 2,500 linked to the signing. The related asset, if recognised, would be amortised over those 9 months. What treatment does IFRS 15 permit?L2
• To enter a new market, Belvue Ingénierie has accepted a fixed-price contract whose expected consideration will not cover the expected fulfilment costs. It pays its salesperson a commission of 15,000 linked to the signing. Management has concluded, on the basis of its budgets (fact of the case), that it does not expect to recover this commission. Fact of the case: the provision for the onerous contract under IAS 37 is recognised separately and is not part of the question. What treatment applies?L3
• Bâtiplus is performing a contract with two performance obligations: the structural work phase, already satisfied and accepted in March 20X1, and the finishing work phase, in progress. In June 20X1, it incurs 14,000 of rework on the structural work and 6,000 of site costs for which it cannot determine whether they relate to one phase or the other. What treatment applies to these two amounts?L3
• In November 20X1, Médisoft incurs 22,000 of direct labour to design the configurations that will be used to operate the information system of a specifically identified hospital, with which a 4-year services contract is expected to be signed in January 20X2. The configurations will be used to provide the future services, these costs are not within the scope of any other standard and Médisoft expects to recover them (facts of the case). How should these 22,000 be treated at 31 December 20X1?L3
• Gardenne elects to recognise as an expense when incurred the incremental costs of obtaining contracts whose asset would have been amortised over one year or less. As this choice is merely a practical expedient, Gardenne need not mention it in its notes.L2