Practical expedients
Practical expedients are optional simplifications in ASC 606 and IFRS 15 that reduce cost without materially changing results. Examples include ignoring a significant financing component of one year or less, expensing contract costs amortised within a year, right-to-invoice measurement, and omitting certain remaining performance obligation disclosures.
Standard references
- ASC 606606-10-32-18 (financing), 606-10-55-18 (right to invoice), 606-10-50-14 (RPO)
- ASC 340-40340-40-25-4 (contract costs)
- IFRS 15paragraphs 63, 94, 121 and B16
Worked example
Illustrative: a company sells 12-month subscriptions at $12,000, billed annually in advance, paying a $1,200 commission on each new deal and an equal commission on every renewal.
- Financing: payment and service are within one year, so no time-value adjustment.
- Contract costs: renewal commissions are commensurate, so the amortisation period is 12 months; the $1,200 can be expensed immediately instead of $100 a month.
- RPO: contracts with an original duration of one year or less can be left out of the remaining performance obligation disclosure.
Result: Three simplifications, each elected as policy and disclosed.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Electing an expedient without disclosing the election where disclosure is required.
- Applying the one-year RPO expedient to multi-year contracts.
- Applying an expedient to some similar contracts but not others.