5.2.6: Contract Costs

IFRS 15 also provides guidance on how to account for costs incurred to obtain and fulfill a contract. When obtaining a contract, any incremental costs incurred should be capitalized as an asset and amortized over the life of the contract. These costs only include those direct costs that would not have been incurred if the contract had not been obtained. A common example would be commissions paid to sales staff. As a practical expedient, the standard allows the costs to be expensed immediately for contracts terms of one year or less. This particular section of the standard has generated some debate, particularly in the telecommunications sector. Common practice in this industry usually involves expensing employee commissions at the time the contract is signed. Some industry representatives have expressed concern that the requirement to capitalize contract costs, along with other aspects of the standard, will result in significant changes and investments in IT systems to properly track the information.

For costs incurred to fulfill a contract, the standard requires capitalization only if the costs relate directly to the contract, the costs generate or enhance resources that will be used to satisfy the performance obligations, and the costs are expected to be recovered. These conditions will generally prevent the capitalization of general and administrative costs that are not explicitly chargeable under a contract or the cost of wasted resources that are not reflected in the price of the contract. However, overhead costs such as project management, supervision, insurance, and depreciation may be eligible for capitalization if they relate directly to the contract.