contract signing and the date in which the contract consideration is due), the entity should
consider whether there is a service condition or other contingency, as discussed above.
10.3.1.B Commission
payments subject to a threshold
In November 2016, the FASB TRG members were asked to consider if commission
payments subject to a threshold could be considered incremental costs. FASB TRG
members generally agreed that basing a commission on a pool of contracts, rather than
paying a set percentage for each contract, would not affect the determination of whether
the commissions would have been incurred if the entity did not obtain the contracts with
those customers.138 Consider the following example from a FASB TRG agenda paper:
Example 28.90: Commission payments subject to a threshold139
An entity has a commission programme that increases the amount of commission a salesperson receives based
on how many contracts the salesperson has obtained during an annual period, as follows:
0-9 contracts
0% commission
10-19 contracts
2% of value of contracts 1-19
20+ contracts
5% of value of contracts 1-20+
The FASB TRG members generally agreed that these costs are incremental costs of obtaining a contract with
a customer. Therefore, the costs should be capitalised when the entity incurs a liability to pay these
commissions. The costs are incremental because the entity will pay the commission under the programme
terms as a result of entering into the contracts. See 10.3.3.D below for discussion about the period over which
an entity would amortise a sales commission that is subject to a threshold and is considered an incremental
cost of obtaining a contract.
10.3.1.C
Would an entity capitalise commissions paid on contract modifications?
An entity would capitalise commissions paid on contract modifications if they are
incremental (i.e. they would not have been incurred if there had not been a
modification) and recoverable. Contract modifications are accounted for in one of three
ways: (1) as a separate contract; (2) as a termination of the existing contract and the
creation of a new contract; or (3) as part of the existing contract (see 4.4 above for
further requirements on contract modifications). In all three cases, commissions paid on
contract modifications are incremental costs of obtaining a contract and should be
capitalised if they are recoverable. In the first two cases, a new contract is created, so
the costs of obtaining that contract would be incremental. The TRG agenda paper no. 23
Revenue
2265
noted that commissions paid on the modification of a contract that is accounted for as
part of the existing contract are incremental costs even though they are not initial
incremental costs.140
10.3.1.D
Would fringe benefits on commission payments be included in the
capitalised amounts?
Fringe benefits should be capitalised as part of the incremental cost of obtaining a
contract if the additional costs are based on the amount of commissions paid and the
commissions qualify as costs to obtain a contract. However, if the costs of fringe benefits
would have been incurred regardless of whether the contract had been obtained
(e.g. health insurance premiums), the fringe benefits should not be capitalised. That is,
an entity cannot allocate fringe benefits to the commission and, therefore, capitalise a
portion of the costs of benefits it would provide regardless of whether the commission
was paid.141
10.3.1.E
Must an entity apply the practical expedient to expense contract
acquisition costs to all of its qualifying contracts across the entity or can
it apply the practical expedient to individual contracts?
We believe the practical expedient to expense contract acquisition costs (that would,
otherwise, be amortised over a period of one year or less) must be applied consistently
to contracts with similar characteristics and in similar circumstances.
10.3.1.F
How would an entity account for capitalised commissions upon a
modification of the contract that is treated as the termination of an
existing contract and the creation of a new contract?
We believe an asset recognised for incremental costs to obtain a contract that exists
when the related contract is modified should be carried forward into the new contract,
if the modification is treated as the termination of an existing contract and the creation
of a new contract and the goods or services to which the original contract cost asset
relates are part of the new contract. This is because the contract cost asset relates to
goods or services that have not yet been transferred and the accounting for the
modification is prospective. This conclusion is similar to the one reached by the
FASB TRG members in relation to the accounting for contract assets upon a contract
modification, as discussed at 11.1.1.E below.
The contract cost asset that remains on the entity’s statement of financial position at the
date of modification would continue to be evaluated for impairment in accordance with
IFRS 15 (see 10.3.4 below). In addition, an entity should determine an appropriate
amortisation period for the contract cost asset (see 10.3.3 below).
10.3.2
Costs to fulfil a contract
The standard divides contract fulfilment costs into two categories: (1) costs that give rise
to an asset; and (2) costs that are expensed as incurred. When determining the
appropriate accounting treatment for such costs, IFRS 15 makes it clear that any other
applicable standards (e.g. IAS 2, IAS 16 or IAS 38) are considered first. That is, if costs
incurred in fulfilling a contract are within the scope of another standard, an entity
accounts for those costs in accordance with those other standards. [IFRS 15.95-96]. If those
2266 Chapter 28
other standards preclude capitalisation of a particular cost, then an asset cannot be
recognised under IFRS 15.
If the costs incurred to fulfil a contract are not within the scope of another standard, an
entity capitalises such costs only if they meet all of the following criteria: [IFRS 15.95]
(a) the costs relate directly to a contract or to an anticipated contract that the entity
can specifically identify (e.g. costs relating to services to be provided under
renewal of an existing contract or costs of designing an asset to be transferred
under a specific contract that has not yet been approved);
(b) the costs generate or enhance resources of the entity that will be used in satisfying
(or in continuing to satisfy) performance obligations in the future; and
(c) the costs are expected to be recovered.
If all of the criteria are met, an entity is required to capitalise these costs. Note that,
when IFRS 16 became effective, it consequentially amended paragraph 97(c) of IFRS 15
to include, as an additional example, ‘right-of-use assets’.
The following figure illustrates these requirements:
Figure 28.20:
Costs to fulfil a contract
Are the costs incurred to fulfil the Yes
Apply the requirements in the other
contract in the scope of another
standard.
standard?
No
Do the costs relate directly to a
No
contract or specifically anticipated
contract?
Yes
Do the costs generate or enhance
No
resources of the entity that will be
Expense the costs as incurred.
used in satisfying performance
obligations in the future?
Yes
No
Are the costs expected to
be recovered?
Yes
Recognise the fulfilment costs
as an asset.
Entities should consider how such costs were recognised under legacy IFRS. If a cost
was determined to be within the scope of legacy IFRS and that standard has not been
superseded, we would expect the costs to remain within the scope of that standard and
Revenue
2267
are not accounted for under IFRS 15. However, if, in the absence of a standard that
specifically applied to this transaction, an entity previously developed and applied an
accounting policy in accordance with IAS 8, it needs to consider whether the costs are
within the scope of IFRS 15.
Legacy IFRS that remains applicable on accounting for costs includes but is not limited
to, the following:
• inventory costs within the scope of IAS 2, except for costs related to service
providers that were consequentially removed when IFRS 15 was issued;
• costs related to the acquisition of an intangible asset within the scope of IAS 38;
• costs attributable to the acquisition or construction of property, plant and
equipment within the scope of IAS 16 or an investment property within the scope
of IAS 40– Investment Property; or
• costs related to biological assets or agricultural produce within the scope of IAS 41
– Agriculture – or bearer plants within the scope of IAS 16.
When determining whether costs meet the criteria for capitalisation, an entity must
consider its specific facts and circumstances. IFRS 15 states that costs can be capitalised
even if the revenue contract with the customer is not finalised. However, rather than
allowing costs to be related to any potential future contract, the standard requires that
the costs be associated with a specifically anticipated contract.
The standard discusses and provides examples of costs that may meet the first criterion
for capitalisation (i.e. costs that relate directly to the contract or a specifically
anticipated contract) as follows: [IFRS 15.97]
(a) direct labour (e.g. salaries and wages of employees who provide the promised
services directly to the customer);
(b) direct materials (e.g. supplies used in providing the promised services to a customer);
(c) allocations of costs that relate directly to the contract or to contract activities (e.g.
costs of contract management and supervision, insurance and depreciation of tools
and equipment used in fulfilling the contract);
(d) costs that are explicitly chargeable to the customer under the contract; and
(e) other costs that are incurred only because an entity entered into the contract (e.g.
payments to subcontractors).
Significant judgement may be required to determine whether costs generate or enhance
resources of the entity that will be used in satisfying performance obligations in the
future. In the Basis for Conclusions, the IASB explained that the standard only results in
the capitalisation of costs that meet the definition of an asset and precludes an entity
from deferring costs merely to normalise profit margins throughout a contract (by
allocating revenue and costs evenly over the contract term). [IFRS 15.BC308].
For costs to meet the ‘expected to be recovered’ criterion, they need to be either
explicitly reimbursable under the contract, or reflected through the pricing on the
contract and recoverable through margin. If the costs incurred in fulfilling a contract do
not give rise to an asset, based on the criteria above, they must be expensed as incurred.
2268 Chapter 28
The standard provides some common examples of costs that must be expensed as
incurred, as follows: [IFRS 15.98]
(a) general and administrative costs (unless those costs are explicitly chargeable to the
customer under the contract, in which case an entity shall evaluate those costs in
accordance with the above criteria for capitalising costs to fulfil a contract);
(b) costs of wasted materials, labour or other resources to fulfil the contract that were
not reflected in the price of the contract;
(c) costs that relate to satisfied (or partially satisfied) performance obligations
(i.e. costs that relate to past performance); and
(d) costs for which an entity cannot distinguish whether the costs relate to unsatisfied
performance obligations or to satisfied (or partially satisfied) performance obligations.
If a performance obligation (or a portion of a performance obligation that is satisfied
over time) has been satisfied, fulfilment costs related to that performance obligation (or
portion thereof) can no longer be capitalised. This is true even if the associated revenue
has not yet been recognised (e.g. the contract consideration is variable and has been
fully or partially constrained). Once an entity has begun satisfying a performance
obligation that is satisfied over time, it would only capitalise costs that relate to future
performance. Accordingly, it may be challenging for an entity to capitalise costs that are
related to a performance obligation that an entity has already started to satisfy.
If an entity is unable to determine whether certain costs relate to past or future
performance and the costs are not eligible for capitalisation under other IFRSs, the costs
are expensed as incurred.
The standard provides the following example that illustrates costs that are capitalised
under other IFRSs, costs that meet the capitalisation criteria and costs that do not.
[IFRS 15.IE192-IE196].
Example 28.91: Costs that give rise to an asset
An entity enters into a service contract to manage a customer’s information technology data centre for five
years. The contract is renewable for subsequent one-year periods. The average customer term is seven years.
The entity pays an employee a $10,000 sales commission upon the customer signing the contract. Before
providing the services, the entity designs and builds a technology platform for the entity’s internal use that
interfaces with the customer’s systems. That platform is not transferred to the customer, but will be used to
deliver services to the customer.
Incremental costs of obtaining a contract
In accordance with paragraph 91 of IFRS 15, the entity recognises an asset for the $10,000 incremental costs
of obtaining the contract for the sales commission because the entity expects to recover those costs through
future fees for the services to be provided. The entity amortises the asset over seven years in accordance with
paragraph 99 of IFRS 15, because the asset relates to the services transferred to the customer during the
contract term of five years and the entity anticipates that the contract will be renewed for two subsequent one-
year periods.
Revenue
2269
>
Costs to fulfil a contract
The initial costs incurred to set up the technology platform are as follows:
$
Design services
40,000
Hardware 120,000
Software 90,000
Migration and testing of data centre
100,000
Total costs
350,000
The initial setup costs relate primarily to activities to fulfil the contract but do not transfer goods or services
to the customer. The entity accounts for the initial setup costs as follows:
(a) hardware costs – accounted for in accordance with IAS 16;
(b) software costs – accounted for in accordance with IAS 38; and
(c) costs of the design, migration and testing of the data centre – assessed in accordance with paragraph 95
of IFRS 15 to determine whether an asset can be recognised for the costs to fulfil the contract. Any
resulting asset would be amortised on a systematic basis over the seven-year period (i.e. the five-year
contract term and two anticipated one-year renewal periods) that the entity expects to provide services
related to the data centre.
In addition to the initial costs to set up the technology platform, the entity also assigns two employees who are
primarily responsible for providing the service to the customer. Although the costs for these two employees are
incurred as part of providing the service to the customer, the entity concludes that the costs do not generate or
enhance resources of the entity (see paragraph 95(b) of IFRS 15). Therefore, the costs do not meet the criteria in
paragraph 95 of IFRS 15 and cannot be recognised as an asset using IFRS 15. In accordance with paragraph 98,
the entity recognises the payroll expense for these two employees when incurred.
10.3.2.A
Can an entity defer costs of a transferred good or service that would
otherwise generate an upfront loss because variable consideration is fully
or partially constrained?
An entity should not defer the costs of a transferred good or service when the application
of the constraint on variable consideration results in an upfront loss, even if the entity
ultimately expects to recognise a profit on that good or service, unless other specific
requirements allow or require a deferral of those costs. The criteria in IFRS 15 must be
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 451
