Contract costs (ASC 340-40)
ASC 340-40 and IFRS 15 require capitalising the incremental costs of obtaining a contract, typically sales commissions, if they are expected to be recovered, and certain costs to fulfil a contract. Capitalised costs are amortised on a systematic basis consistent with the transfer of the related goods or services, including anticipated renewals.
Standard references
- ASC 340-40340-40-25-1 to 25-8 and 340-40-35-1 (25-4: one-year expedient)
- IFRS 15paragraphs 91–104
- Ind AS 115paragraphs 91–104
Worked example
Illustrative: a 10% commission on a $120,000 three-year deal. Renewal commissions are 2%, which is not commensurate with the initial rate, and the expected customer life is five years.
- Capitalised cost: 10% × $120,000 = $12,000.
- Because renewal commissions are not commensurate, amortise over the expected customer life, not the initial term.
- Amortisation: $12,000 / 60 months = $200 a month.
Result: $12,000 asset amortised at $200 a month over five years, tested for impairment.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Capitalising costs that would have been incurred anyway, such as base salaries.
- Amortising over the initial contract term when renewal commissions are not commensurate.
- Skipping impairment testing of the capitalised balance.