Costs to obtain freight and logistics contracts: capitalize versus expense

Incremental commissions paid to brokers or agents for successfully winning a freight or logistics contract are capitalized as a contract asset and amortized over the contract or expected customer relationship period, rather than expensed immediately, while bid preparation costs that would have been incurred regardless of winning are expensed as incurred. Expensing genuinely incremental commissions immediately understates assets and overstates the current period's expense relative to the multi-year revenue the commission helped generate.

For each cost incurred to obtain a freight or logistics contract, is it genuinely incremental, meaning it would not have been incurred if the contract had not been won (e.g., a success-based broker or agent commission), as opposed to a cost the entity would bear regardless of outcome (e.g., internal bid team salaries or tender preparation)? Is the capitalized asset amortized on a systematic basis consistent with the transfer of the related services, and is the amortization period limited to the initial contract term or extended to cover expected renewals where relevant? Has the one-year practical expedient been correctly assessed and, if applicable, applied to expense the cost immediately instead?

1) For each cost incurred in obtaining a contract, ask whether it is incremental, i.e. it would not have been incurred if the contract had not been won (e.g. a success-based broker or agent commission). 2) If incremental, capitalize it as a contract asset (asset for costs to obtain a contract), provided the entity expects to recover the cost (directly or indirectly through the contract's margin). 3) Apply the practical expedient to expense the cost immediately if the expected amortization period is one year or less, even if technically incremental. 4) For costs that would have been incurred regardless of winning the contract (internal bid-team salaries, tender document preparation, travel to pitch meetings), expense them as incurred, these are never capitalized under this guidance regardless of materiality. 5) Determine the amortization period based on the period over which the related goods/services transfer, considering anticipated contract renewals if the commission effectively also relates to securing those renewals.

Measure the capitalized asset at the amount of the incremental cost actually incurred (e.g. the commission amount payable/paid). Amortize on a systematic basis consistent with the transfer of the related goods or services to the customer (typically straight-line over the contract term, or a longer period if the commission is expected to also benefit anticipated renewals). Test the asset for impairment if there are indicators the remaining expected consideration will not cover the carrying amount of the asset plus remaining costs to provide the services.

Disclose: (1) the closing balance of assets recognized for costs to obtain contracts; (2) the amortization method and period used; (3) amounts amortized to expense and any impairment losses recognized during the period; (4) the practical expedient election (if applied) to expense costs with an amortization period of one year or less; (5) the nature of costs capitalized (e.g. broker commissions) versus expensed (e.g. bid preparation).

• Expensing all broker commissions immediately regardless of whether the one-year practical expedient genuinely applies to multi-year contracts, understating assets and overstating current expense
• capitalizing internal bid-team costs or tender document preparation costs that would have been incurred win or lose, which is never permitted regardless of amount
• using an amortization period shorter than the actual expected customer relationship when renewals are highly likely and the commission structure effectively covers them
• failing to test the capitalized asset for impairment when a contract becomes loss-making.