Under IFRS 15, costs to obtain a contract that would have been incurred irrespective of whether the contract was obtained are recognized as an expense when incurred, unless those costs are explicitly chargeable to the customer irrespective of whether the contract is obtained.
The incremental costs of obtaining a contract with a customer are recognized as an asset if the entity expects to recover those costs. Those incremental costs are costs incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained.
The standard provides a practical expedient, whereby an entity may recognize the incremental costs of obtaining a contract as an expense when incurred, if the amortization period of the asset resulting from the incremental costs is one year or less.
ABC Ltd, a provider of consulting services, wins a competitive bid to provide consulting services to a new customer for 3 years. The entity incurred the following costs to obtain the contract:
- Due diligence fees – $12.000
- Travel costs to deliver bid proposal – $18.000
- Commissions paid to salesperson – $9.000
The entity recognizes an asset for the $9.000 incremental costs of obtaining the contract arising from the commissions to salesperson.
The costs related to the delivery of the bid proposal & due diligence do not qualify because those costs would have been incurred even if the company did not ultimately obtain the contract.
ABC Ltd should amortize the recognized asset over the three-year contract term.