IFRS 15 and Contract Costs: Accounting and Capitalization Guidelines

IFRS 15 and Contract Costs: Accounting and Capitalization Guidelines

Posted In | Finance | Accounting Software | Revenue Recognition

The International Financial Reporting Standard (IFRS) 15, "Revenue from Contracts with Customers," not only revolutionizes the way companies recognize revenue, but it also introduces new guidelines for accounting for contract costs. These rules can significantly impact how companies report and analyze their financial performance. This article aims to elucidate the guidelines under IFRS 15 concerning contract costs, including their accounting and capitalization.

 

1. IFRS 15 and Contract Costs

Under IFRS 15, companies are required to capitalize the incremental costs of obtaining a contract if they expect to recover those costs. Incremental costs are those costs that a company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission). Additionally, IFRS 15 allows companies to capitalize the costs to fulfill a contract, but only if those costs are not addressed elsewhere in the IFRS. These costs must meet certain criteria, including: they directly relate to a contract (or a specific anticipated contract), they generate or enhance resources that will be used in satisfying future performance obligations, and they are expected to be recovered.

 

2. Accounting for Contract Costs
 

  1. Incremental Costs of Obtaining a Contract: Companies should recognize as an asset the incremental costs of obtaining a contract with a customer if the company expects to recover those costs. If the amortization period would be one year or less, the company can choose to expense these costs as incurred.
     

  2. Costs to Fulfill a Contract: If the costs incurred in fulfilling a contract are not within the scope of another IFRS standard (like IAS 2 Inventories), then a company will recognize an asset from the costs to fulfill a contract only if these costs meet specific criteria outlined in IFRS 15.
     

3. Capitalization Guidelines
 

  1. Amortization and Impairment: The capitalized costs should be amortized over the period that the company transfers goods or services to the customer, and the asset is subject to impairment testing.
     

  2. Practical Expedient: A practical expedient allows the recognition of the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
     

4. Best Practices
 

  1. Assess the Costs: Companies should carefully assess their contract costs to determine if they meet the criteria for capitalization under IFRS 15.
     

  2. Implement Robust Systems: To track, amortize, and test for impairment of these capitalized costs, businesses need robust systems in place.
     

  3. Consult with Experts: Given the complexity of these requirements, companies may need to seek advice from accounting and financial reporting experts.

 

IFRS 15 brings a new level of complexity to the accounting for contract costs. It's crucial for companies to understand these rules and their implications to ensure accurate and compliant financial reporting. By capitalizing contract costs appropriately, businesses can provide a more transparent and comparable picture of their financial performance, aligning with the primary objective of IFRS 15.