A sales team wins a contract and the company pays commission on the spot. An implementation team then spends weeks setting the service up before the customer sees any of it. Should that spending go straight to profit or loss, or does IFRS 15 let it sit on the statement of financial position as an asset? It is one of the questions students and preparers most often get wrong, because the standard treats the two kinds of cost under different tests.
Costs to obtain versus costs to fulfil
IFRS 15 separates the cost of winning a contract from the cost of delivering it. Each has its own recognition test, and the tests ask different things. One turns on whether the cost is incremental, meaning it would not have arisen without the contract. The other has to clear several criteria, and it only applies when no other standard already covers the cost. Mixing the two up is the classic exam trap, and it is just as common in practice.
What happens after recognition
Recognising an asset is only the start. Over what period should the asset be amortised, and on what basis? What happens when the service starts later than the contract is signed? How does the impairment test work, and what does the entity have to disclose about these balances at year end? Each answer moves reported profit.
The shortcut that is not automatic
There is also a practical expedient for costs of obtaining a contract, and it is easy to misread. When can an entity choose to expense a commission straight away, and what does the eligibility test actually look at? The lesson sets the two options side by side so you can see what each does to the accounts.
Learn it through one worked example
The lesson follows a single software contract through its first year, with both kinds of cost, the journals and the disclosure table. You will decide which costs qualify, how any asset is used up and what the year-end note shows.
Work through the full IFRS 15 contract costs lesson at Amatle Institute and test your own answer against the worked example.
Questions about this topic
What is the difference between costs to obtain and costs to fulfil a contract under IFRS 15?
Both can end up on the statement of financial position, but IFRS 15 puts them through separate recognition tests that ask different questions. The lesson sets the two tests side by side and has you decide which test each cost in a software contract faces and whether it passes.
Can a sales commission always be expensed straight away under IFRS 15?
That turns on two questions that are easy to run together: whether the commission is eligible for the IFRS 15 practical expedient at all, and what the entity then does about it. The lesson works through what the eligibility test actually looks at before it turns to the accounts.
How is a contract cost asset amortised?
The lesson starts with what the amortisation basis is meant to track, then asks what changes when the service goes live after the contract is signed. Which date starts the clock, and over what period is the asset used up? Work it through in the lesson's software contract example.
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