IFRS 15 – Costs to fulfil a contract

If the costs to fulfil a contract (e.g. a construction company may need to mobilize equipment to the construction site) are not within the scope of another Standard (e.g. IAS 2 Inventories or IAS 16 Property, Plant and Equipment), they should be recognized as an asset only if they meet all of the following:

  • the costs relate directly to a contract or an anticipated contract that the entity can specifically identify;
  • the costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and
  • the costs are expected to be recovered.

Example

An entity enters into a service contract to manage a customer’s information technology data center for five years. The contract is renewable for subsequent one-year periods. The average customer term is seven years.

Before providing the services, the entity designs and builds a technology platform for the entity’s internal use that interfaces with the customer’s systems. That platform is not transferred to the customer, but will be used to deliver services to the customer.

The initial costs incurred to set up the technology platform are as follows:

  • Design services $40.000
  • Hardware $120.000
  • Software $90.000
  • Migration and testing of data center $100.000
  • General administrative costs $35.000

Solution

The entity accounts for the initial setup costs as follows:

  • Hardware costs – accounted for in accordance with IAS 16.
  • Software costs – accounted for in accordance with IAS 38.
  • Costs of the design, migration and testing of the data center – assessed in accordance with IFRS 15 to determine whether an asset can be recognized for the costs to fulfil the contract.
  • General administrative costs should be expensed when incurred.

Any capitalized asset under IFRS 15 should be amortized over 7 years based on the information provided (anticipated period of the contract).


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