Mobilization and contract fulfilment costs

Contractors often expense all pre-construction mobilization costs immediately out of habit or conservatism, but IFRS 15 requires qualifying fulfilment costs directly related to a specific, identifiable contract to be capitalized and amortized over the construction period, expensing them immediately understates early-period margin and creates an artificial loss-making appearance at contract inception, which can misrepresent contract profitability trends to management and lenders during the mobilization phase.

Do the mobilization or setup costs relate directly to a specific, identifiable contract rather than to general bidding activity across multiple prospective projects? Do these costs generate or enhance a resource (site facilities, access roads, batching plants) that will be used to satisfy performance obligations over the construction period? Are the costs expected to be recovered through the contract rather than absorbed as a sunk cost? Is the resulting fulfilment cost asset being amortized on a basis consistent with the transfer of the related goods or services?

1. Confirm the cost relates directly to a specific, identifiable contract (or an anticipated contract the entity can specifically identify), such as direct labor, materials, and subcontractor costs to set up site facilities for that project.
2. Confirm the cost generates or enhances resources that will be used to satisfy performance obligations in the future (not merely activity that produces no future resource).
3. Confirm the cost is expected to be recovered through the contract (i.e. the contract is expected to be profitable, or at least the cost is recoverable).
4. If all three criteria are met, capitalize the cost as a contract fulfilment cost asset; if any fail, expense as incurred.
5. Expense bid, tender, and other pre-contract-signature pursuit costs unless they meet the incremental-costs-of-obtaining-a-contract criteria and a practical expedient or contract-specific identification applies.
6. Amortize the capitalized asset systematically consistent with the transfer pattern of the goods or services to which it relates (typically over the construction period, often aligned with the progress measure).

Measure the fulfilment cost asset at the actual cost incurred that meets the three capitalization criteria (direct labor, materials and directly attributable subcontractor/overhead costs); exclude costs that would be incurred regardless of whether the contract was obtained or that relate to satisfied performance obligations already recognized. At each reporting date, assess for impairment by comparing the asset's carrying amount to the remaining consideration expected less remaining costs to provide the related goods or services; write down and recognize an impairment loss if the carrying amount is not recoverable.

Disclose: (1) the closing balance of contract fulfilment cost assets, presented separately from inventory or PP&E; (2) the amortization method used and the amount of amortization recognized in the period; (3) any impairment losses recognized and reversed; (4) the accounting policy for distinguishing capitalizable fulfilment costs from expensed pre-contract pursuit costs.

• Expensing all mobilization costs immediately out of conservatism even where they clearly meet the three capitalization criteria
• capitalizing general bid and tender costs incurred before contract award that do not relate to a specific, identifiable contract
• amortizing the fulfilment cost asset on a straight-line time basis when the actual pattern of related revenue transfer (cost-to-cost progress) is markedly different
• failing to test the asset for impairment when a contract'
• s expected profitability deteriorates
• capitalizing costs that would have been incurred regardless of whether the contract was won (e.g. general company overhead not directly attributable).