Amortisation and impairment of contract cost assets

Learning objectives

• Calculate the amortisation of an asset recognised for contract costs on a systematic basis consistent with the transfer of the related goods or services (including anticipated renewals).L2, L3
• Calculate the impairment loss when the carrying amount exceeds the remaining consideration expected less the directly related costs not yet recognised, and explain the prohibition on reversal above the carrying amount that would have been determined had no impairment been recognised.L2, L3
• Record the amortisation and impairment loss of the asset recognised for contract costs.L2, L3

Normative references

• IFRS 15 §99The asset arising from the costs of obtaining or fulfilling a contract is amortised on a systematic basis consistent with the pattern of transfer to the customer of the goods or services to which it relates, including those under a specifically identified anticipated contract.
• IFRS 15 §100The entity updates the amortisation to reflect a significant change in the expected timing of transfer of the goods or services; this is a change in accounting estimate under IAS 8.
• IFRS 15An impairment loss is recognised in profit or loss when the carrying amount of the asset exceeds the remaining amount of consideration that the entity expects to receive for the goods or services to which it relates, less the costs that relate directly to providing them and that have not been recognised as expenses.
• IFRS 15 §102For this test, the expected consideration is determined using the principles for determining the transaction price, without applying the constraint on estimates of variable consideration, but adjusted to reflect the customer's credit risk.
• IFRS 15Before recognising an impairment loss on an asset for contract costs, the entity first recognises any impairment loss on assets related to the contract that are within the scope of other standards (for example IAS 2, IAS 16, IAS 38); the carrying amount of the asset is then included in the cash-generating unit tested under IAS 36.
• IFRS 15 §104The entity recognises in profit or loss a reversal of some or all of an impairment loss previously recognised when the impairment conditions no longer exist or have improved, without the carrying amount exceeding the amount that would have been determined (net of amortisation) if no impairment loss had been recognised previously.

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

10 questions

• Valdrome amortises an asset recognised from the costs of obtaining a contract. During the second year, it finds that the expected timing of transfer of the services to the customer has changed significantly. It must restate the amortisation of prior periods in the same way as an error is corrected.L2
• Ardelis pays its salesperson a commission of 6,000 on signing a 2-year maintenance contract. Based on its history, Ardelis has specifically identified an anticipated renewal for 2 additional years, for which no commission will be paid. The services are provided evenly and the commission meets the conditions for recognition as an asset. Over what period is the asset amortised?L2
• Brenval pays a commission of {commission} to a business introducer to obtain an IT hosting contract with a term of {initial_term} years. Brenval has specifically identified an anticipated renewal with a term of {renewal_term} year, for which no commission will be due. The service is provided evenly over time; Brenval therefore uses straight-line amortisation. Calculate the annual amortisation charge of the asset recognised from the costs of obtaining the contract.L2
• On 1 April 20X1, Corvelle signs a remote monitoring subscription of {initial_term} months and pays its sales agent a commission of {commission}, recognised as an asset. Corvelle anticipates a specifically identified extension of {renewal_term} months, with no new commission. The service is provided evenly every month. Corvelle's reporting date is 31 December. What is the amortisation expense of this asset for the year 20X1?L3
• At 31 December 20X1, Doravel holds an asset recognised from the costs to fulfil a software development contract, with a carrying amount of {carrying_amount}. It still expects to receive {remaining_consideration} for the services to which this asset relates. The costs that relate directly to providing those services and have not yet been recognised as expenses are estimated at {remaining_costs}. Calculate the impairment loss to be recognised.L2
• Estenor has recognised as an asset the set-up costs of a logistics contract; at 31 December 20X2, their carrying amount is {carrying_amount}. For the services still to be provided, Estenor still expects a fixed fee of {fixed_consideration} and a performance bonus whose most likely amount is estimated at {variable_bonus}; this bonus is excluded from the transaction price because of the constraint on variable consideration. Given the customer's credit risk, Estenor estimates that it will not recover {credit_risk_adjustment} of this consideration. The costs that relate directly to the remaining services and have not yet been recognised as expenses amount to {remaining_costs}. Calculate the impairment loss on the asset.L3
• On 1 January 20X1, Fenmore recognised as an asset a commission of {commission_asset} paid to obtain an industrial cleaning contract with a term of {contract_term} years; no renewal is anticipated. The services are provided evenly over the whole term. Record the amortisation entry at 31 December 20X1.L2
• Galvora has recognised as an asset {setup_costs} of set-up costs for a production line dedicated to a customer. These costs relate to the {total_units} components to be delivered under the current contract and a specifically identified anticipated contract. Galvora judges that amortisation based on the units delivered reflects the pattern of transfer of the components to the customer. In 20X1, {units_20x1} components are delivered. Record the amortisation entry for 20X1.L3
• Iselor recognised as an asset a commission of 24,000, amortised on a straight-line basis over 4 years from 1 January 20X1. At the end of 20X1, after amortisation of 6,000, it reduced the asset from 18,000 to 12,000 through an impairment loss of 6,000. In 20X2, amortisation is 4,000 (12,000 spread over 3 years) and the carrying amount reaches 8,000. At the end of 20X2, the impairment conditions have clearly improved: the remaining expected consideration, less the directly related costs not yet recognised as expenses, amounts to 20,000. What reversal does Iselor recognise in profit or loss?L3
• Hautvallon tests for impairment an asset recognised from the costs to fulfil a services contract. Which statements about this test are correct?L3