Contract costs to obtain and fulfil a contract

Incremental costs of obtaining a contract and qualifying fulfilment costs must be capitalized and amortized consistent with the transfer of the related goods or services, not expensed immediately; expensing sales commissions upfront understates early-period margins in a way that is inconsistent with when the related revenue is recognized. Regional practice on commission capitalization is inconsistent, making this a common source of non-comparability and a frequent audit adjustment area for developers.

Is each cost to obtain a contract (e.g. sales commission) genuinely incremental, and would the one-year practical expedient improperly be applied to a contract spanning well over a year? Do fulfilment costs meet all three criteria (relate directly to an identifiable contract, generate or enhance a resource for future performance, expected to be recovered) before being capitalized? Is the capitalized asset amortized on a basis consistent with the actual transfer pattern of the specific unit's construction/handover schedule, not a default straight-line unrelated to that pattern? Is the asset tested for impairment and written down when the related unit sale is cancelled or will not generate the expected remaining consideration?

1) For each cost incurred to obtain a contract (e.g., sales agent commission), test whether it is incremental - it would not have been incurred if the contract had not been obtained (success-based commissions typically qualify; salaries paid regardless of outcome do not). 2) If incremental and the entity expects to recover it (through margin in the contract), capitalize it as an asset; apply the practical expedient to expense it immediately if the amortization period would have been one year or less. 3) For costs to fulfil a contract not addressed by another standard (IAS 2, IAS 16, IAS 38), test the three IFRS 15 criteria together: the costs relate directly to an identifiable contract, they generate or enhance a resource that will be used to satisfy future performance obligations, and they are expected to be recovered. 4) If all three fulfilment-cost criteria are met, capitalize; otherwise expense as incurred (this typically rules out general design/feasibility costs incurred before contract certainty, and routine mobilization costs that do not enhance a distinct future resource). 5) Amortize the capitalized asset on a systematic basis consistent with the transfer pattern of the goods/services to which the asset relates (e.g., over the construction/handover period of the specific unit the commission relates to), not on a straight-line default unrelated to that pattern. 6) At each reporting date, test the asset for impairment: write it down if its carrying amount exceeds the remaining consideration expected less remaining costs to provide the related goods/services (e.g., on cancellation of the related unit sale).

Measurement base: the asset for incremental costs to obtain a contract is initially measured at the actual cost incurred (e.g., the commission amount paid or accrued), capitalized only if expected to be recovered; the practical expedient allows immediate expensing if the amortization period is one year or less. Fulfilment-cost assets meeting the three IFRS 15 criteria are similarly measured at cost incurred, to the extent not already capitalized under IAS 2 or IAS 16. Subsequent measurement: the asset is amortized on a systematic basis consistent with the transfer pattern of the related goods/services (typically tracking the specific unit's construction/handover schedule), and tested for impairment at each reporting date by comparing its carrying amount to the remaining expected consideration less remaining costs to provide the related goods/services, with any excess written off immediately.

Disclose the closing balance of assets recognized for costs to obtain and costs to fulfil contracts, by main category; disclose the amortization method and the amortization expense/period used, linking it to the pattern of transfer of the related goods/services; disclose any impairment losses recognized on these assets during the period and the circumstances (e.g., unit cancellations); disclose the practical expedient policy choice (expensing costs with amortization periods of one year or less) if applied; present the asset separately from inventory/contract assets or clearly identify it within other assets.

• Expensing all sales commissions immediately on payment regardless of contract duration, instead of capitalizing and amortizing incremental commissions expected to be recovered over more than one year
• capitalizing general marketing, advertising, or unsuccessful bid costs that are not incremental to obtaining the specific contract
• failing to write down the contract cost asset when the related unit sale is cancelled or otherwise will not generate the expected remaining consideration
• amortizing the asset on a default straight-line basis unrelated to the actual pattern of transfer of the related units or phases
• applying the one-year practical expedient to commissions on contracts that in substance span well over a year, understating the balance sheet asset.