1. What does IFRS 15 actually say about contract costs, and where do its rules stop?
IFRS 15 does not contain a general cost model. It contains two narrow gates. IFRS 15.91 to 15.94 deal with the incremental costs of obtaining a contract, of which a sales commission is the standard's own example. IFRS 15.95 to 15.98 deal with costs to fulfil a contract, but only where those costs fall outside every other Standard. Everything that survives either gate is then amortised under IFRS 15.99 and 15.100 and impaired under IFRS 15.101 to 15.104. Anything that does not reach a gate is either someone else's Standard or an expense.
"This Standard specifies the accounting for the incremental costs of obtaining a contract with a customer and for the costs incurred to fulfil a contract with a customer if those costs are not within the scope of another Standard (see paragraphs 91-104). An entity shall apply those paragraphs only to the costs incurred that relate to a contract with a customer (or part of that contract) that is within the scope of this Standard."
That sentence sets two boundaries at once and both are routinely ignored. The first is subject matter: IFRS 15 speaks to costs of obtaining and costs of fulfilling, and to nothing else. There is no IFRS 15 answer to how a research programme, a restructuring, a customer relationship acquired in a business combination or a pre-contract feasibility study is accounted for. The second is scope by contract: the paragraphs apply only where the underlying contract is itself in the scope of IFRS 15. Costs incurred on a lease within IFRS 16, an insurance contract within IFRS 17 or a financial instrument within IFRS 9 do not enter here, whatever the sales team calls them.
The practical consequence is that a contract cost analysis has to start with a scope question, not a capitalisation question. The instinct in most finance teams runs the other way. Somebody asks whether a commission can be capitalised, and the analysis begins at IFRS 15.91. That is the second question. The first is whether the cost sits inside IFRS 15 at all.
Two gates, not one policy
It helps to see the structure before the detail, because the two gates are drafted differently and confusing them produces most of the errors in this area. The costs-to-obtain gate in IFRS 15.91 has a single recognition criterion, expected recovery, applied to a defined population, incremental costs. It contains no requirement that the cost generate a resource. The costs-to-fulfil gate in IFRS 15.95 has three cumulative criteria and applies only after another Standard has declined the cost. It is a harder gate, and it is subordinate.
| Feature | Costs to obtain (IFRS 15.91 to 15.94) | Costs to fulfil (IFRS 15.95 to 15.98) |
|---|---|---|
| Population | Incremental costs only, as defined in IFRS 15.92 | Any fulfilment cost not within another Standard, per IFRS 15.95 opening words |
| Priority over other Standards | None stated. IFRS 15.91 applies to the incremental cost directly | Subordinate. IFRS 15.96 sends the cost to the other Standard |
| Recognition criteria | One: the entity expects to recover the cost | Three cumulative criteria in IFRS 15.95(a), (b) and (c) |
| Resource creation required | No | Yes, IFRS 15.95(b) |
| Anticipated contracts | Not in the recognition test, but relevant to the amortisation period through IFRS 15.99 | Yes, expressly in IFRS 15.95(a) |
| Practical expedient | Yes, IFRS 15.94, one year or less | None |
| Amortisation | IFRS 15.99 and 15.100 | IFRS 15.99 and 15.100 |
| Impairment | IFRS 15.101 to 15.104 | IFRS 15.101 to 15.104 |
Note the asymmetry in row two. IFRS 15.96 expressly subordinates fulfilment costs to other Standards. There is no equivalent sentence for costs to obtain. A sales commission is not tested against IAS 38 first and IFRS 15.91 second. IFRS 15.91 says the entity "shall recognise as an asset" the incremental costs of obtaining a contract where recovery is expected, and that is a recognition requirement in its own terms. This matters because IAS 38.69(c) would expense advertising and promotional expenditure, and a commission scheme that was analysed as promotional spend would never be capitalised. The reason commissions are capitalised is that IFRS 15.91 puts them in a category of their own.
"An entity shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs."
Three words carry the weight. "Shall" makes this mandatory, not an election, subject only to the IFRS 15.94 expedient. "Incremental" is defined in the next paragraph and is narrower than most schemes assume. "Expects to recover" is the only economic filter, and it is a low one. It is not a probability threshold expressed in the standard, it is not the impairment test in IFRS 15.101, and it is not a test of whether the individual contract is profitable in its first year. Recovery is assessed against the consideration the entity expects from the goods or services to which the asset relates, which under IFRS 15.99 may extend beyond the initial contract.
What the standard deliberately does not answer
Four questions come up constantly and IFRS 15 answers none of them directly. The first is the unit of account for the cost asset: whether a portfolio of similar commissions can be tracked as a single asset. IFRS 15.4 permits a portfolio approach where the entity reasonably expects the effects on the financial statements would not differ materially from applying the standard to individual contracts, and that permission is drafted to cover the whole standard rather than revenue alone. The second is how to split a single cost asset between multiple performance obligations. The third is where amortisation of the asset is presented in profit or loss. The fourth is what happens when the IFRS 15.101 test produces a negative number, which is an onerous contract question that IFRS 15 does not deal with and IAS 37 does, and which is picked up in the note on IAS 37 onerous contracts.
Silence is not permission to do anything. Where the standard is silent, IAS 8.10 to 8.12 require a policy to be developed that produces relevant and reliable information, working from the requirements in IFRS Standards dealing with similar issues and then from the Conceptual Framework. In practice that means an entity chooses, documents and applies consistently, and the disclosure requirement in IFRS 15.127(b) then forces the amortisation method into the notes where a reader can see it. The five-step model that generates all of this sits in the complete guide to IFRS 15 revenue recognition, and the contract cost asset is best understood as the cost-side counterpart to the balances covered in the note on contract assets and contract liabilities.
Practitioner note
The fastest diagnostic on a contract cost balance is to ask what population it was built from. If the answer is "the commission accrual", the entity has capitalised a payroll number rather than performed the IFRS 15.92 test, and the balance will contain non-incremental elements. If the answer is "project work in progress", the entity has probably capitalised costs that IFRS 15.98(c) requires to be expensed because they relate to performance already delivered. Neither balance is wrong on its face. Both are wrong if nobody has run the test.
Local FAQs
Is capitalising a sales commission optional under IFRS 15? No, subject to one expedient. IFRS 15.91 says the entity "shall recognise as an asset" the incremental costs of obtaining a contract where recovery is expected. The only relief is the practical expedient in IFRS 15.94, which is available where the amortisation period would be one year or less. An entity that expenses commissions on multi-year contracts because it prefers the presentation has not made a policy choice, it has departed from the standard.
Does IFRS 15 override IAS 38 for commissions? The question is framed wrongly. IFRS 15.96 subordinates fulfilment costs to other Standards. It says nothing about costs to obtain. IFRS 15.91 recognises an asset for incremental costs of obtaining a contract on its own terms, and that is the requirement that applies. The IFRS 15.96 sequencing question arises for the fulfilment side, and is worked through in Unit 6.
Potential risks
The risk in this unit is a policy written at the wrong level. A group accounting manual that says "contract costs are capitalised where the criteria in IFRS 15 are met" has stated nothing. It does not say which gate applies to which cost category, it does not record whether the IFRS 15.94 expedient has been taken, and it gives the local finance teams no basis for a consistent answer. IFRS 15.129 specifically requires disclosure of the fact that the IFRS 15.94 expedient has been elected, so a manual that is silent on the election is also a disclosure risk.
2. What counts as an incremental cost of obtaining a contract, and which parts of a commission scheme fail the test?
IFRS 15.92 defines the incremental costs of obtaining a contract as those an entity incurs to obtain a contract that it would not have incurred if the contract had not been obtained, and it names a sales commission as the example. The test is counterfactual and it is applied to the individual element of the scheme, not to the scheme as a whole. IFRS 15.93 then expenses anything that would have been incurred regardless of the outcome, unless it is explicitly chargeable to the customer whether or not the contract is won. Most commission schemes contain elements that pass and elements that fail, and the balance capitalised should reflect that split.
"The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission)."
The definition is a hypothetical. Rewind to the moment before signature, assume the contract was lost, and ask whether the cost would still have been paid. If the answer is yes, the cost is not incremental. That is the whole test, and it is deliberately mechanical because it removes the temptation to reason from the commercial purpose of the spend. Advertising is incurred to obtain contracts. Sales salaries are incurred to obtain contracts. Bid teams exist to obtain contracts. None of them is incremental, because all of them are paid whether or not any particular contract closes.
Two features of the drafting are worth pressing on. First, the test is set at the level of the individual contract, "a contract with a customer", not at the level of the sales function or the period. A commission pool that is fixed in total and merely divided between representatives fails, because the pool would have been paid out even if this contract had been lost. Second, the definition is silent on who receives the payment. There is nothing restricting incremental costs to employee compensation. A payment to an external introducer, a broker fee, a channel partner referral fee and an origination fee to a dealer are all capable of being incremental costs of obtaining a contract if they are payable only on a contract being obtained.
"Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained shall be recognised as an expense when incurred, unless those costs are explicitly chargeable to the customer regardless of whether the contract is obtained."
This is the mirror of IFRS 15.92 and it does two things. It confirms the default, which is expense as incurred, and it carves out one narrow exception. The exception is not "recoverable in economic substance" and it is not "included in the pricing model". It is "explicitly chargeable to the customer regardless of whether the contract is obtained", which means there has to be an enforceable right to invoice the customer for that cost even in the scenario where the deal falls away. That happens, for instance, where a customer agrees to fund a feasibility study or a design phase whether or not it proceeds to the main contract. It does not happen because the bid cost was built into the day rate.
Where the exception is met, IFRS 15.93 does not itself capitalise the cost. It removes the mandatory expensing. The cost then has to find a home, which will normally be IFRS 15.97(d), costs that are explicitly chargeable to the customer under the contract, feeding the fulfilment cost asset in IFRS 15.95. That is a route through two paragraphs and it is worth setting out in full in the working paper rather than asserting the answer.
Dissecting a real commission scheme
Commission schemes are rarely a single line. A typical enterprise scheme pays a representative on signature, pays employer social security on that payment, pays a manager an override, runs a discretionary annual bonus pool, and sits on top of base salaries and a bid function. The IFRS 15.92 test has to be run on each element separately. Running it on the total produces a wrong answer in one direction or the other, and it is usually the direction that flatters the current period.
| Scheme element | CU | Would it have been paid if the contract had been lost? | Conclusion |
|---|---|---|---|
| Sales representative commission, payable only on signature | 24,000 | No | Incremental. Capitalise under IFRS 15.91 |
| Employer payroll taxes on that commission at 13% | 3,120 | No, the charge arises only because the commission is paid | Incremental. Capitalise under IFRS 15.91 |
| Regional manager override, 25% of the representative's commission, payable only on this contract closing | 6,000 | No, it is calculated on and triggered by this contract | Incremental and directly attributable to an identified contract. Capitalise |
| External introducer fee, payable only on award | 2,880 | No | Incremental. Capitalise under IFRS 15.91 |
| Sales representative base salary for the pursuit period | 18,000 | Yes | IFRS 15.93 expense as incurred |
| External legal due diligence and bid preparation | 9,000 | Yes, incurred in trying to obtain the contract | IFRS 15.93 expense as incurred |
| Travel to deliver the pitch | 4,000 | Yes | IFRS 15.93 expense as incurred |
| Share of discretionary year-end bonus pool attributed to the win | 5,000 | Yes, the pool is fixed and would be distributed regardless | IFRS 15.93 expense as incurred |
| Capitalised under IFRS 15.91 | 36,000 | ||
| Expensed under IFRS 15.93 | 36,000 | ||
| Total scheme cost of the win | 72,000 |
Exactly half of the scheme cost fails, which is not a coincidence of the numbers chosen so much as a fair reflection of how these schemes are built. The elements that pass are the ones with a trigger event. The elements that fail are the ones that fund the sales capability. An entity that capitalises the whole CU 72,000 has treated the cost of running a sales force as an asset, and IFRS 15.93 does not allow that.
| Account | Dr (CU) | Cr (CU) |
|---|---|---|
| Contract cost asset, costs to obtain a contract (IFRS 15.91) | 36,000 | |
| Selling and distribution expenses (IFRS 15.93) | 36,000 | |
| Cash and accrued employee benefits | 72,000 | |
| Total | 72,000 | 72,000 |
The manager override, and why it is the hardest line in the table
The override in the table above passes because it is calculated as a percentage of a commission on an identified contract and is payable only if that contract closes. Change one fact and it fails. Suppose the override is instead paid where the manager's region hits an annual revenue target. The manager may still receive it in a year in which this particular contract was lost, provided other contracts closed. The counterfactual in IFRS 15.92 is then answered "yes, it might well have been paid", and the amount is not attributable to an identified contract. IFRS 15.93 expenses it.
The intermediate case is a tiered scheme, where the representative earns 5% on the first CU 2 million of annual bookings and 8% above that. The 8% is triggered by the individual contract only in the sense that it is the contract that tipped the cumulative total. Two defensible positions exist. One is to capitalise at the effective rate applicable to that contract at the time the obligation arises, which requires the entity to determine when a present obligation to pay exists. The other is to treat the incremental cost as the amount directly attributable to that contract on a consistent allocation basis. What is not defensible is capitalising the 8% on every contract in the year because the target was ultimately met, since the earlier contracts did not trigger the higher rate and the counterfactual for each of them fails.
Recognise the asset when you recognise the liability. A capitalised commission is the debit side of an entry whose credit is a liability or a cash payment. Where the entity has no present obligation to pay a commission at the reporting date, there is no cost to capitalise. This bites on renewal commissions. Where a two-year contract carries an initial commission on signature and a further commission only if the customer renews at the end of year two, the entity generally capitalises only the initial payment at inception, because the enforceable rights and obligations extend only to the initial term and the second payment is not yet owed. Where instead the second payment falls due on the first anniversary of an existing non-cancellable term and depends only on the passage of time, the obligation exists at inception and both amounts are capitalised then.
Regulator finding: what the FRC found in capitalised contract cost disclosure
In its follow-up thematic review of IFRS 15 reporting, the Financial Reporting Council reported being concerned by the lack of information disclosed about contract costs by companies whose activities suggested contract costs would be relevant to them. Fewer than a third of the companies in the review's quick review sample disclosed an accounting policy for contract costs at all. The review recorded that costs to obtain a contract predominantly comprise sales commission costs, which is the point at which the IFRS 15.92 analysis in this unit becomes a disclosure matter rather than a technical one. Where a company pays commissions on multi-year contracts and its notes are silent, a reader cannot tell whether the amounts were capitalised, whether the IFRS 15.94 expedient was taken, or what the amortisation period is.
Financial Reporting Council, IFRS 15 Revenue from Contracts with Customers: a follow-up thematic review, September 2020.Local FAQs
Are employer payroll taxes on a capitalised commission themselves capitalised? Yes, on the same reasoning. The employer charge arises only because the commission is paid, and the commission is paid only because the contract was obtained. The counterfactual in IFRS 15.92 gives the same answer for both. The same logic extends to a fringe benefit or a pension contribution calculated on the commission element of pay, but not to the pension contribution on base salary.
Can a commission paid to a third party be an incremental cost of obtaining a contract? Yes. IFRS 15.92 does not restrict the recipient. A broker fee, a channel partner referral payment or an introducer fee payable only on a contract being obtained meets the definition. The practical difficulty is usually evidence rather than principle: third party arrangements often mix a success fee with a retainer, and only the success element is incremental.
What about a signing bonus paid to the customer? That is not a cost of obtaining a contract at all. Consideration payable to a customer is dealt with in IFRS 15.70 to 15.72 and is normally a reduction of the transaction price rather than a cost, unless it is in exchange for a distinct good or service. Routing it through IFRS 15.91 both overstates revenue and creates an asset that should not exist. The transaction price mechanics are set out in the note on transaction price allocation.
Potential risks
The dominant risk is that the capitalised balance is built from the payroll system rather than from the IFRS 15.92 test. Payroll knows what was paid to whom. It does not know which payments were conditional on a contract being obtained. Where a single monthly commission run mixes signature bonuses, retention payments, quota accelerators and discretionary awards, the finance team needs a mapping from scheme rule to accounting conclusion, refreshed each time the scheme is redesigned. Sales compensation plans change annually in most organisations, and a contract cost policy written against last year's plan will be wrong in ways nobody notices until the balance is material.
3. What does "expects to recover" mean, and when can the IFRS 15.94 practical expedient be used?
Recovery under IFRS 15.91 is assessed against the consideration expected from the goods or services to which the asset relates, which under IFRS 15.99 can extend beyond the initial contract term. It is a recognition filter, not the impairment test, and the two are measured differently. The practical expedient in IFRS 15.94 allows the incremental costs of obtaining a contract to be expensed as incurred where the amortisation period of the asset that would otherwise have been recognised is one year or less. It is available only for costs to obtain, never for costs to fulfil, and the one year is tested against the amortisation period, not against the contract term.
"As a practical expedient, an entity may recognise the incremental costs of obtaining a contract as an expense when incurred if the amortisation period of the asset that the entity otherwise would have recognised is one year or less."
Read the condition carefully. It is not "if the contract is for one year or less". It is not "if the commission is small". It is "if the amortisation period of the asset that the entity otherwise would have recognised is one year or less". The amortisation period is determined under IFRS 15.99, which points at the transfer of the goods or services to which the asset relates and which expressly contemplates a specific anticipated contract. So the test loops back through the renewal analysis before it can be answered.
The circular-looking consequence is the single most useful thing to understand about IFRS 15.94. A telecoms or subscription business writing twelve-month contracts with a high renewal rate cannot simply declare that its contracts are annual and expense the commissions. It has to work out the amortisation period first. If that period includes specifically anticipated renewals and therefore exceeds a year, the expedient is unavailable and the commission is capitalised. The expedient offers real relief only to an entity writing genuinely short arrangements without a meaningful expectation of renewal.
"An entity shall consider the terms of the contract and all relevant facts and circumstances when applying this Standard. An entity shall apply this Standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances."
This is the paragraph that stops an entity cherry picking. The IFRS 15.94 expedient cannot be applied to the contracts where expensing produces a convenient answer and ignored where capitalising does. Contracts with similar characteristics get the same treatment. Where a group has genuinely different businesses, one writing short transactional contracts and one writing multi-year managed services, the characteristics differ and different conclusions can follow, but the conclusion follows from the characteristics rather than from a segment-by-segment election.
IFRS 15.129 then requires the fact of the election to be disclosed: "If an entity elects to use the practical expedient in either paragraph 63 (about the existence of a significant financing component) or paragraph 94 (about the incremental costs of obtaining a contract), the entity shall disclose that fact." A great many sets of accounts capitalise nothing and say nothing, which leaves a reader unable to distinguish an entity with no incremental costs from an entity that elected the expedient from an entity that simply never performed the analysis.
Recovery in IFRS 15.91 against recoverable amount in IFRS 15.101
These are two different tests applied at two different times and it is worth separating them explicitly, because files routinely run one and label it the other.
| IFRS 15.91 expected recovery | IFRS 15.101 impairment test | |
|---|---|---|
| When | At initial recognition of the cost | At each reporting date, after the IFRS 15.103 sequencing step |
| Question asked | Does the entity expect to recover this cost? | Does the carrying amount exceed remaining consideration less remaining directly related costs? |
| Measurement of consideration | Not prescribed. A judgement about expected recovery | Prescribed by IFRS 15.102: transaction price principles, excluding the constraint in 15.56 to 15.58, adjusted for the customer's credit risk |
| Costs deducted | Not prescribed | IFRS 15.101(b): costs relating directly to providing those goods or services that have not been recognised as expenses, by reference to IFRS 15.97 |
| Effect of failure | No asset is recognised. The cost is expensed | An impairment loss is recognised in profit or loss |
| Reversal | Not applicable | Required by IFRS 15.104 when conditions no longer exist or have improved, capped at the amount that would have been determined net of amortisation |
The recognition filter is deliberately loose. An entity that pays CU 36,000 to win a contract that will generate CU 480,000 of consideration and CU 288,000 of direct costs plainly expects to recover the commission and needs no arithmetic to say so. The filter bites in the cases where it should: a loss-leading contract entered into to gain a foothold, a commission paid on a contract the entity already knows is priced below cost, a payment made on a contract with a customer whose ability to pay is doubtful. In those cases the IFRS 15.91 recovery expectation fails at inception and there is no asset to impair later.
Practitioner note
The IFRS 15.91 recovery test is the right place to deal with commissions on contracts that are individually loss-making but strategically justified. Preparers often want to capitalise on the basis that the customer relationship will be profitable overall. That argument has to be routed through IFRS 15.99 and the anticipated contract language in IFRS 15.95(a), because it is an argument that the asset relates to goods or services beyond the initial contract. If the entity is not prepared to say that in the amortisation policy, it should not be relying on it in the recognition test. Consistency between the two is what a reviewer looks for.
Where the one year expedient actually helps
Three fact patterns qualify comfortably. Contracts with a fixed term of a year or less where the entity pays a separate, commensurate commission on any renewal, so that each commission relates only to its own period. Spot or transactional sales where the commission relates to a single delivery. Contracts where the goods or services to which the commission relates are all transferred within twelve months even though the legal term is longer, for example a supply contract with a twenty-four month administrative term but a single delivery in month two.
Three fact patterns do not qualify, and are frequently claimed to. Rolling monthly subscriptions with high retention, because IFRS 15.99 points at the goods or services the asset relates to and a specifically anticipated renewal is expressly within scope. Annual contracts where the renewal commission is materially smaller than the initial commission, because the initial payment is then in part a prepayment for the economic benefits of the renewal periods. Multi-element contracts where any one performance obligation extends beyond twelve months, because the asset relates to all of the goods and services in the contract and the amortisation period follows the longest of them.
The expedient is not a materiality shortcut. IFRS 15.94 is conditioned on the amortisation period, not on the size of the balance. An entity that expenses CU 3 million of commissions on three-year contracts because the amount is immaterial to the group has applied general materiality, not IFRS 15.94, and should document it that way. The distinction matters because a materiality judgement has to be revisited as the balance grows, and because IFRS 15.129 requires disclosure of the IFRS 15.94 election specifically. Disclosing an election that was never made is a misstatement of the accounting policy.
Local FAQs
Can the IFRS 15.94 expedient be applied to costs to fulfil a contract? No. The paragraph refers only to "the incremental costs of obtaining a contract". There is no equivalent relief in IFRS 15.95 to 15.98. A fulfilment cost asset with a short amortisation period is still recognised and still amortised, subject only to general materiality.
Is the expedient an accounting policy choice or a contract-by-contract decision? It is a policy choice, but IFRS 15.3 requires it to be applied consistently to contracts with similar characteristics and in similar circumstances. The assessment of whether the condition is met, the one year amortisation period, is made contract by contract or portfolio by portfolio, so an entity can elect the expedient as its policy and still find that it is unavailable for a particular class of contract.
Does the twelve months run from the contract date or from the first transfer? Neither directly. IFRS 15.94 refers to the amortisation period of the asset, and IFRS 15.99 sets that period by reference to the transfer of the goods or services to which the asset relates. Where transfer starts three months after signature and runs for eleven months, the amortisation period is eleven months and the expedient is available even though fourteen months elapse from signature.
Potential risks
Two risks sit here. The first is an expedient claimed on the wrong condition, typically by reading IFRS 15.94 as a one year contract term test. That is the most common single error in this part of the standard and it systematically understates assets and overstates first period expense in subscription businesses. The second is an election that is real but undisclosed, breaching IFRS 15.129. Both are cheap to fix and both are visible to a reviewer who reads the policy note against the revenue profile: a company describing multi-year customer contracts, disclosing no contract cost asset and making no reference to the expedient has an unexplained gap.
4. Why is the amortisation period for a capitalised sales commission not the contract term?
Because IFRS 15.99 does not mention the contract term. It requires amortisation on a systematic basis consistent with the transfer to the customer of the goods or services to which the asset relates, and it then states that the asset may relate to goods or services to be transferred under a specific anticipated contract as described in IFRS 15.95(a). Where a commission paid at inception also buys the entity the economic benefit of expected renewals, the goods or services to which it relates extend past the initial term, and so does the amortisation period. Defaulting to the stated term is the most common error in this area and it front-loads expense.
"An asset recognised in accordance with paragraph 91 or 95 shall be amortised on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The asset may relate to goods or services to be transferred under a specific anticipated contract (as described in paragraph 95(a))."
The second sentence is the operative one and it is easy to skim past. It is not a permission to look through to renewals in unusual cases. It is a statement about what the asset can relate to, and it applies to assets recognised under paragraph 91 as well as paragraph 95, because the sentence sits in a paragraph that governs both. That is significant, because IFRS 15.95(a) itself only governs fulfilment costs. Without the cross-reference in IFRS 15.99, a costs-to-obtain asset would have no textual hook to an anticipated contract at all.
The first sentence sets the pattern, not just the period. "Systematic basis that is consistent with the transfer" is not a synonym for straight line. Where the goods or services to which the asset relates are delivered unevenly, the amortisation should be uneven. A commission relating to a contract with a large delivery in year one and a maintenance tail in years two to five is not amortised evenly across five years, because that would not be consistent with the transfer. Straight line is a common answer because many of these contracts do transfer evenly, not because the standard defaults to it.
"(a) the costs relate directly to a contract or to an anticipated contract that the entity can specifically identify (for example, 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);"
The bracketed example is the standard telling you, in its own words, that a renewal of an existing contract is the paradigm case of a specifically identifiable anticipated contract. It is not an edge case reached by analogy. The qualifier is "specifically identify", which requires more than a general expectation that some customers renew. It requires the entity to identify the anticipated contract, which in practice means a defined customer, a defined service and evidence supporting the expectation of renewal for that class of arrangement.
Note also the second bracketed example, design costs for a contract that has not yet been approved. That is a fulfilment cost incurred before any contract exists. IFRS 15.95(a) admits it. This is the paragraph that lets a bidder capitalise design work on a project it expects to win, provided the other two criteria in IFRS 15.95 are also met, and it sits in sharp contrast to IFRS 15.93, which expels bid costs on the obtain side. The two sides of the standard treat pre-contract expenditure differently and that is deliberate.
The commensurate renewal commission test
The standard does not tell you how to decide whether a commission relates to renewals. Practice has converged on an economic test that flows from IFRS 15.99, and it works by comparing what the entity pays for the renewal with what it pays for the initial win, in the light of the margin it earns in each period.
Start from the purpose of the payment. A commission buys the entity a stream of economic benefit. If the entity pays a renewal commission that is proportionate to the renewal contract's value, then each commission has bought its own period and nothing is left over. The initial commission relates to the initial term and amortises over it. The renewal commission relates to the renewal period and amortises over that. Where the renewal commission is materially smaller than the initial commission but the margin earned in the renewal period is the same, the arithmetic only works if part of the initial payment was buying the renewal. The initial payment is then, in part, a prepayment for the benefits of the renewal period, and IFRS 15.99 requires the amortisation period to reflect that.
| Fact pattern | Renewal commission against initial | Margin in renewal period | Amortisation period for the initial commission |
|---|---|---|---|
| Renewal commission roughly proportional to renewal contract value | Commensurate | Similar to initial | Initial contract term only |
| Renewal commission materially smaller, renewal margin similar | Not commensurate | Similar to initial | Initial term plus specifically anticipated renewal periods |
| No commission paid on renewal at all | Not commensurate | Similar to initial | Initial term plus specifically anticipated renewal periods |
| Renewal commission smaller but renewal margin proportionately smaller too | Arguably commensurate | Lower, proportionate to the commission | Initial contract term. The reduced commission reflects a reduced benefit, not a prepaid one |
| Renewals not specifically identifiable, high churn, no reliable class experience | Not relevant | Not relevant | Initial contract term. IFRS 15.95(a) is not satisfied |
Worked example 1, part B: the wrong answer and the right answer
Continue the facts from Unit 2. The entity capitalised CU 36,000 at inception of a two-year managed services contract. Two further facts complete the picture. The entity pays a renewal commission of CU 4,000 when a customer renews for a further two years, against CU 24,000 on the initial win, and the margin the entity earns in a renewal period is the same as in the initial period. Based on class experience with substantially similar contracts, the entity specifically anticipates one two-year renewal, giving an expected total transfer period of four years. Transfer of the service is even across the whole period.
The renewal commission is one sixth of the initial commission while the economic benefit of the renewal period matches that of the initial period. The commissions are not commensurate. The initial payment therefore relates in part to the renewal period, and IFRS 15.99 requires amortisation over four years. The renewal commission of CU 4,000, when it is incurred at the start of year three, relates only to the renewal period and amortises over two years.
| Year | Wrong: initial commission over the 2 year stated term | Right: initial commission over the 4 year expected transfer period | Difference in the P&L charge |
|---|---|---|---|
| Year 1 | 18,000 | 9,000 | 9,000 too high |
| Year 2 | 18,000 | 9,000 | 9,000 too high |
| Year 3 | 2,000 | 11,000 | 9,000 too low |
| Year 4 | 2,000 | 11,000 | 9,000 too low |
| Total | 40,000 | 40,000 | nil |
Both columns total CU 40,000, being the CU 36,000 capitalised at inception plus the CU 4,000 renewal commission capitalised at the start of year three. The error is entirely one of timing, and it is a large one: the charge in each of years one and two is double what it should be, and the charge in each of years three and four is less than a fifth of what it should be. On a portfolio of contracts written evenly over time the effect partly washes out, which is why the error survives. On a growing book it does not wash out, because each year brings in more new contracts than the prior year and the front-loaded charge never catches up. A business scaling its subscriber base and expensing commissions over the stated term will report a persistently depressed margin that has no economic counterpart.
| Year | Opening | Additions | Amortisation | Closing |
|---|---|---|---|---|
| Year 1 | nil | 36,000 | (9,000) | 27,000 |
| Year 2 | 27,000 | nil | (9,000) | 18,000 |
| Year 3 | 18,000 | 4,000 | (11,000) | 11,000 |
| Year 4 | 11,000 | nil | (11,000) | nil |
| Total | 40,000 | (40,000) | nil |
The year three charge of CU 11,000 is CU 9,000 of the original commission plus CU 2,000 of the renewal commission, which is the point the standard is making when it says the pattern must be consistent with the transfer of the goods or services to which the asset relates. The charge is higher in the renewal period than in the initial period, which looks counter-intuitive until you remember that two assets are running at once by then.
| Entry | Account | Dr (CU) | Cr (CU) |
|---|---|---|---|
| Inception | Contract cost asset, costs to obtain | 36,000 | |
| Inception | Selling and distribution expenses | 36,000 | |
| Inception | Cash and accrued employee benefits | 72,000 | |
| Year 1 | Amortisation of contract cost assets | 9,000 | |
| Year 1 | Contract cost asset | 9,000 | |
| Year 2 | Amortisation of contract cost assets | 9,000 | |
| Year 2 | Contract cost asset | 9,000 | |
| Start of year 3, renewal signed | Contract cost asset | 4,000 | |
| Start of year 3, renewal signed | Cash and accrued employee benefits | 4,000 | |
| Year 3 | Amortisation of contract cost assets | 11,000 | |
| Year 3 | Contract cost asset | 11,000 | |
| Year 4 | Amortisation of contract cost assets | 11,000 | |
| Year 4 | Contract cost asset | 11,000 | |
| Total across all entries | 116,000 | 116,000 |
The totals foot at CU 116,000 on each side: CU 72,000 at inception, CU 4,000 on renewal and CU 40,000 of amortisation debits, against CU 72,000, CU 4,000 and CU 40,000 of credits. The contract cost asset nets to nil across the four years, having been debited CU 40,000 and credited CU 40,000.
Local FAQs
Does the amortisation period equal the average customer life? Not automatically. IFRS 15.95(a) requires an anticipated contract that the entity can "specifically identify". An average customer life derived from a churn statistic across a whole customer base is evidence, and it is often the starting point, but the conclusion has to be reached for a class of contracts with similar characteristics rather than asserted from a single group-wide number. Where a business has genuinely different segments with different renewal behaviour, one period for all of them is unlikely to be supportable.
Can the amortisation period be shorter than the contract term? Yes, where the asset relates only to goods or services transferred in part of the term. A commission earned on the equipment element of a bundled contract, where the equipment transfers at a point in time in month one, relates to that transfer and not to the five year service tail. This is one of the cases where allocating the cost asset between performance obligations produces a materially different answer from applying a single measure of progress across the whole contract.
What happens if the customer leaves early? The asset relates to goods or services that will now not be transferred. The IFRS 15.101 impairment test is the mechanism, and in a straightforward early termination the remaining consideration falls to nil or to a termination payment, so the asset is written down. Where the entity has a portfolio-level expectation of churn already built into the amortisation period, individual departures are absorbed by the pattern rather than triggering asset-by-asset impairment.
Potential risks
The risk here is a period chosen once and never revisited. Renewal behaviour changes. A product becomes less sticky, a competitor enters, a pricing change alters the incentive to renew. IFRS 15.100 requires the amortisation to be updated for a significant change in the expected timing of transfer and to treat that as a change in accounting estimate under IAS 8, which means prospective adjustment rather than restatement. A file that sets a four year period in the year of adoption and has never documented a reassessment is not applying IFRS 15.100, and an auditor should ask what evidence supports the period in the current year rather than in the year the policy was written.
5. When is it wrong to look through to renewals?
Three situations. Where the renewal commission is commensurate with the initial commission, because each payment has then bought its own period and nothing is prepaid. Where the anticipated renewal cannot be specifically identified, because IFRS 15.95(a) requires identification rather than hope. And where the entity has no enforceable expectation of continuing to supply, because the goods or services simply will not be transferred. Extending the period in any of those cases defers cost that belongs in the current year, which is the mirror image of the error in Unit 4 and is the one that flatters profit.
Case one: the renewal commission is commensurate
Take the same contract as in Unit 4 with one fact changed. The entity pays CU 24,000 on the initial two year contract and CU 22,000 on each two year renewal, and the contract value and margin in the renewal period are broadly the same as in the initial period. The two payments are reasonably proportional to their respective contract values. Nothing about the initial payment is buying the renewal period, because the entity will pay again, and pay a similar amount, to secure it.
On those facts the answer is two years, not four. The initial commission and its associated payroll taxes, override and introducer fee amortise over the initial two year term. The renewal commission is capitalised when the obligation to pay it arises, at renewal, and amortises over the renewal period. The commission expense reported in each year is broadly level, which is the economically faithful result.
| Year | Asset additions | Amortisation | Closing asset |
|---|---|---|---|
| Year 1 | 36,000 | (18,000) | 18,000 |
| Year 2 | nil | (18,000) | nil |
| Year 3 | 33,000 | (16,500) | 16,500 |
| Year 4 | nil | (16,500) | nil |
| Total | 69,000 | (69,000) | nil |
The year three addition of CU 33,000 is the CU 22,000 renewal commission grossed up on the same basis as the initial win: payroll taxes at 13% on CU 22,000 is CU 2,860, a manager override at 25% of the representative's commission is CU 5,500, and the introducer fee is assumed to be CU 2,640, giving CU 22,000 plus CU 2,860 plus CU 5,500 plus CU 2,640, which is CU 33,000. Amortised over two years that is CU 16,500 a year. The roll-forward foots: additions of CU 69,000 against amortisation of CU 69,000, closing at nil.
Note what has happened to the reported charge. Under this fact pattern the expense is CU 18,000, CU 18,000, CU 16,500, CU 16,500. Under the non-commensurate facts in Unit 4 it was CU 9,000, CU 9,000, CU 11,000, CU 11,000. The commercial arrangements are similar in shape and the accounting answers differ by a factor of two in the early years. That is why the commensurate assessment has to be documented rather than assumed, and why the same entity can properly reach different periods for different products.
Practitioner note
The commensurate test compares two things and preparers frequently compare only one. It is not enough to observe that the renewal commission is smaller. The comparison is between the commission paid and the economic benefit obtained. A renewal commission that is half the initial commission is commensurate if the margin in the renewal period is also half, and not commensurate if the margin is the same. Ask for the margin analysis, not just the commission schedule. Where the entity cannot produce the margin by period, it has not done the test.
Case two: the anticipated contract cannot be specifically identified
IFRS 15.95(a) uses the words "an anticipated contract that the entity can specifically identify". That phrase does real work. A general expectation that some proportion of customers renew is not identification. What the entity needs is a defined class of contract, a defined service that will be provided under the renewal, and evidence from substantially similar arrangements supporting the expectation. Relevant evidence includes the entity's own history with that customer class, predictive data from comparable contracts, and information about whether the market for the service will still exist when renewal falls due.
The last of those is the one most often skipped. An entity anticipating a renewal five years out has to be able to say that it expects the service still to be in demand and still to be offered. A product approaching end of life, a service being displaced by the entity's own next generation offering, or a regulatory change that will remove the requirement the service satisfies are all reasons why past renewal rates do not support a future anticipated contract. Extrapolating a churn statistic through a technology transition is not an application of IFRS 15.95(a).
Length is not neutral. Lengthening the amortisation period reduces the current period charge and increases the balance sheet asset. That gives it the same directional bias as an optimistic useful life under IAS 16 or an optimistic impairment assumption. IFRS 15.127(a) requires the entity to describe the judgements made in determining the amount of the costs incurred to obtain or fulfil a contract, and IFRS 15.127(b) requires the method used to determine amortisation for each period. Where the period materially exceeds the contract term, the note should say so and say why, because a reader cannot otherwise assess it.
Case three: no expectation of continuing supply
This is the simplest case and the one where preparers reach for the renewal argument hardest, because it usually arises where the contract is thin. A commission has been paid on a contract that will not, on its own, recover it. The temptation is to extend the amortisation period so that the asset is measured against a longer stream of consideration. But IFRS 15.99 does not permit a period chosen to make the asset recoverable. It requires a period consistent with the transfer of the goods or services to which the asset relates, and if the entity does not expect to transfer anything beyond the initial term then the asset relates to the initial term.
Where that produces a recovery problem, the answer is IFRS 15.91. If the entity does not expect to recover the cost, no asset is recognised at all and the commission is expensed as incurred. That is a worse-looking answer in the period and a correct one. Solving a recognition problem by stretching a measurement input is the failure mode to watch for.
Local FAQs
Is there a maximum amortisation period? The standard sets none. In practice periods of three to seven years are common in subscription and telecoms businesses. A period materially longer than that starts to look like a customer relationship intangible rather than a contract cost, and the entity should be able to explain why the anticipated contracts remain specifically identifiable that far out. A ten year period supported only by a low current churn rate is unlikely to survive review.
If the entity pays no renewal commission at all, is the period always extended? Not always, but the presumption is strong. Paying nothing on renewal while earning the same margin means the initial payment secured the whole relationship. The exception is where renewals genuinely are not specifically identifiable, in which case the entity has no anticipated contract to point at and the period stays at the initial term even though the economics suggest otherwise. That combination should be rare and should be explained.
Does a customer's right to cancel affect the period? It affects the enforceable term, which is a different question. The enforceable term drives what is in the contract for revenue purposes, and that feeds the analysis in the note on performance obligations. The amortisation period under IFRS 15.99 is set by expected transfer, including transfer under anticipated contracts, so a cancellable arrangement with a strong renewal record can carry an amortisation period longer than its enforceable term. The two concepts diverge and that divergence is deliberate.
Potential risks
The risk is asymmetric documentation. Entities are usually careful to justify a period that exceeds the contract term, because they know it looks aggressive. They are rarely careful to justify a period that equals the contract term, because it looks conservative. Both are estimates and both need support. A file that records "amortised over the contract term" with no analysis of renewal commissions or renewal margins has not applied IFRS 15.99 in either direction, and the fact that the answer happens to be prudent does not make it right.
6. How do the three IFRS 15.95 criteria work for costs to fulfil a contract, and what does IFRS 15.96 send elsewhere?
IFRS 15.95 is a subordinate gate with a sequence built into it. The opening words send the cost to another Standard first, and only what is left is tested. What is left has to satisfy all three of IFRS 15.95(a), (b) and (c): it relates directly to a contract or a specifically identifiable anticipated contract, it generates or enhances resources that will be used in satisfying performance obligations in the future, and it is expected to be recovered. IFRS 15.96 then confirms that costs within another Standard are accounted for under that Standard. In practice the second criterion does the most work, because it is a forward-looking test that expels anything relating to performance already delivered.
"If the costs incurred in fulfilling a contract with a customer are not within the scope of another Standard (for example, IAS 2 Inventories, IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets), an entity shall recognise an asset from the costs incurred to fulfil a contract only if those costs meet all of the following criteria: (a) the costs relate directly to a contract or to an anticipated contract that the entity can specifically identify (for example, 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."
The conditional clause at the front is not scene setting. It is the first test, and failing to run it is the single most frequent error in fulfilment cost accounting. IAS 2, IAS 16 and IAS 38 are examples, not an exhaustive list. Employee benefits sit in IAS 19, borrowing costs in IAS 23, provisions in IAS 37, right-of-use assets in IFRS 16. A cost that any of those Standards addresses does not reach IFRS 15.95 at all.
Criterion (b) is the one that changes answers. "Resources of the entity that will be used in satisfying performance obligations in the future" is forward-looking on its face and the word "future" is doing the work. A cost that has already been consumed in delivering something to the customer has not generated a resource that will be used in future. It has been used. That is why IFRS 15.98(c) expels costs relating to satisfied or partially satisfied performance obligations, and why an entity recognising revenue over time on an output method cannot warehouse its production costs in a fulfilment asset.
Criterion (c) is the same low filter as in IFRS 15.91. It is not the impairment test in IFRS 15.101 and it is not a profitability test on the contract as a whole. It asks whether the entity expects the consideration attributable to the related goods or services to cover the cost.
"For costs incurred in fulfilling a contract with a customer that are within the scope of another Standard, an entity shall account for those costs in accordance with those other Standards."
This paragraph gives IFRS 15 no discretion. It is not a preference and it is not a choice about which model gives the more useful result. A cost within IAS 2 is inventory, measured at the lower of cost and net realisable value, recognised in profit or loss when the related revenue is recognised under IAS 2.34. A cost within IAS 16 is property, plant and equipment, depreciated over its useful life. A cost within IAS 38 that fails the IAS 38 recognition criteria is an expense, and it stays an expense. IFRS 15.95 cannot be used to rescue expenditure that IAS 38 has already rejected.
That last point is the one the IFRS Interpretations Committee has had to make explicitly, and it disposes of a family of arguments that look attractive to preparers. The reasoning runs: this training cost, this relocation cost, this recruitment cost is directly attributable to the contract, so it must be a fulfilment cost. IFRS 15.96 answers that the attribution is irrelevant if another Standard already has jurisdiction.
IFRS Interpretations Committee: training costs to fulfil a contract
The Committee considered an entity that entered into a service contract with a customer and incurred training costs so that its employees could deliver the contracted services, in circumstances where the contract allowed the entity to charge those training costs to the customer. The Committee concluded that IAS 38 applies to the training expenditure rather than IFRS 15, and that under IAS 38 training expenditure is recognised as an expense when it is incurred because it does not create an asset the entity controls. The Committee stated that the entity recognises the training costs to fulfil the contract with the customer as an expense when incurred, and that the entity's ability to charge the customer for the cost of training does not affect that conclusion.
The second half of that conclusion is the useful part. IFRS 15.97(d) brings costs that are explicitly chargeable to the customer under the contract into the population of costs that relate directly to a contract. Preparers read that as a capitalisation trigger. It is not. IFRS 15.97 only populates the category once IFRS 15.95 has been satisfied, and IFRS 15.95 cannot be reached where IFRS 15.96 has sent the cost to IAS 38. Rechargeability affects recovery, not scope.
IFRS Interpretations Committee, agenda decision, Training Costs to Fulfil a Contract (IFRS 15 Revenue from Contracts with Customers), March 2020.IFRS Interpretations Committee: costs to fulfil a contract where revenue is recognised over time
The Committee considered an entity that transfers control of goods over time and therefore recognises revenue progressively, measuring progress using an output method, and that incurs construction costs on the work performed on the goods being transferred to the customer. The question was whether those construction costs could be recognised as an asset. The Committee's analysis was that the costs relate to partially satisfied performance obligations, that is to past performance, so they do not generate or enhance resources that will be used in satisfying performance obligations in the future and therefore fail IFRS 15.95(b), while IFRS 15.98(c) requires costs relating to satisfied or partially satisfied performance obligations to be recognised as expenses when incurred. The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine how to recognise costs incurred in fulfilling a contract and did not add the matter to its agenda.
The practical bite of this decision falls on entities using an output method on long-term contracts. An input method measured by costs incurred lines revenue up with cost by construction. An output method does not, and where output-based revenue lags cost incurred, the temptation is to defer the excess cost to restore the margin. This decision closes that route. The excess is an expense, and the resulting margin profile is the honest one. The choice of measure of progress is dealt with in the note on over time against point in time recognition.
IFRS Interpretations Committee, agenda decision, Costs to Fulfil a Contract (IFRS 15 Revenue from Contracts with Customers), June 2019.Worked example 2: running the gate across a mobilisation programme
An entity wins a five year managed infrastructure contract. Before the service goes live it incurs a mobilisation programme. The following is an arithmetic example constructed for illustration. Each cost is tested first against IFRS 15.96, then against the three criteria in IFRS 15.95, and then against the expulsion list in IFRS 15.98.
| # | Cost | CU 000 | IFRS 15.96: another Standard? | 15.95(a) | 15.95(b) | 15.95(c) | Treatment |
|---|---|---|---|---|---|---|---|
| 1 | Design and configuration labour building the customer-specific platform, pre go-live | 180 | No | Yes, relates directly to the contract | Yes, creates the platform used to deliver future service | Yes | Fulfilment cost asset, IFRS 15.95. Direct labour under IFRS 15.97(a) |
| 2 | Spare parts and consumables held for the contract | 60 | Yes, IAS 2 | n/a | n/a | n/a | Inventory under IAS 2 by force of IFRS 15.96 |
| 3 | Dedicated test rig purchased for the contract | 95 | Yes, IAS 16 | n/a | n/a | n/a | Property, plant and equipment under IAS 16. Its depreciation is then a directly related cost under IFRS 15.97(c) |
| 4 | Perpetual software licence acquired to deliver the contract | 40 | Yes, IAS 38 | n/a | n/a | n/a | Intangible asset under IAS 38 |
| 5 | Training the entity's own engineers on the customer's equipment, rechargeable under the contract | 25 | Yes, IAS 38 | n/a | n/a | n/a | Expense as incurred. IAS 38 rejects it and rechargeability does not change that |
| 6 | Wasted materials on a rework not reflected in the contract price | 18 | No | Yes | No | No | Expense as incurred, IFRS 15.98(b) |
| 7 | Costs of interim services already delivered during mobilisation | 30 | No | Yes | No, relates to past performance | Yes | Expense as incurred, IFRS 15.98(c) |
| 8 | General and administrative overhead, not explicitly chargeable | 22 | No | No | No | n/a | Expense as incurred, IFRS 15.98(a) |
| 9 | Set-up work for a specifically anticipated two year extension not yet approved | 15 | No | Yes, expressly within IFRS 15.95(a) | Yes | Yes | Fulfilment cost asset, IFRS 15.95 |
| 10 | Subcontractor mobilisation payment incurred only because of this contract | 45 | No | Yes, IFRS 15.97(e) | Yes | Yes | Fulfilment cost asset, IFRS 15.95 |
| Recognised as an IFRS 15 fulfilment cost asset (1, 9, 10) | 240 | ||||||
| Accounted for under another Standard (2, 3, 4) | 195 | ||||||
| Expensed as incurred (5, 6, 7, 8) | 95 | ||||||
| Total mobilisation programme | 530 |
The three subtotals reconcile: CU 240,000 plus CU 195,000 plus CU 95,000 is CU 530,000, which equals the sum of the ten individual costs. Less than half the programme reaches the IFRS 15 fulfilment asset, and the largest single reason is not that the costs failed the three criteria but that IFRS 15.96 removed them before the criteria were reached. That is the ordering point in Unit 1 restated in numbers.
| Account | Dr | Cr |
|---|---|---|
| Contract cost asset, costs to fulfil a contract (IFRS 15.95) | 240 | |
| Inventories (IAS 2) | 60 | |
| Property, plant and equipment (IAS 16) | 95 | |
| Intangible assets (IAS 38) | 40 | |
| Operating expenses (IFRS 15.98 and IAS 38) | 95 | |
| Cash, trade payables and accrued employee benefits | 530 | |
| Total | 530 | 530 |
Cost 9 deserves a second look because it is the one preparers are most reluctant to capitalise. CU 15,000 of set-up work has been performed for a contract extension that has not been signed. There is no enforceable right to anything. Yet IFRS 15.95(a) names exactly this case: "costs of designing an asset to be transferred under a specific contract that has not yet been approved". The condition is that the anticipated contract can be specifically identified, and here it can, because it is a named extension of an existing arrangement with an identified customer. Whether the entity should capitalise turns on the evidence for the extension, not on whether a signature exists.
Local FAQs
Are mobilisation and set-up costs always capitalised? No. They are capitalised only where they generate or enhance a resource that will be used to satisfy performance obligations in the future. Building a customer-specific platform does. Recruiting and inducting a delivery team does not, because IAS 38 has jurisdiction over training and staff costs of that kind and expenses them. The fact that IFRS 15.25 excludes set-up activities from being performance obligations is a separate point about the revenue side and does not decide the cost side.
Can costs to fulfil be capitalised before a contract exists? Yes, on the express terms of IFRS 15.95(a), provided the anticipated contract is specifically identifiable and the other two criteria are met. This is the sharpest asymmetry in this part of the standard. Bid costs on the obtain side are expelled by IFRS 15.93 because they would have been incurred regardless of winning. Design costs on the fulfil side are admitted by IFRS 15.95(a) because they create a resource. The same pursuit can therefore generate both an expense and an asset.
Does an entity have a choice between the IFRS 15 fulfilment asset and IAS 2 or IAS 38? No. IFRS 15.96 makes it mandatory. Where a cost falls within another Standard, that Standard applies, whatever the presentational preference. The only judgement is whether the cost really does fall within the other Standard, and that judgement is made against the other Standard's own scope and recognition criteria, not against IFRS 15.
Potential risks
The main risk is a fulfilment asset built from a cost centre rather than from the criteria. Project accounting systems accumulate everything charged to a job code. That population includes the IAS 2 items, the IAS 16 items, the wasted materials in IFRS 15.98(b) and the costs of work already delivered in IFRS 15.98(c). Capitalising the job code balance and calling it a contract fulfilment asset produces a number that is wrong in several directions at once and that cannot be explained line by line when challenged. The control is a cost taxonomy agreed before the contract starts, mapped from the entity's own chart of accounts to the paragraphs, so the accounting is decided once rather than argued about at each period end.
7. What does IFRS 15.97 let into the fulfilment asset, and what does IFRS 15.98 throw straight out?
IFRS 15.97 lists five categories of cost that relate directly to a contract or a specific anticipated contract: direct labour, direct materials, allocations of costs that relate directly to the contract or to contract activities, costs explicitly chargeable to the customer, and other costs incurred only because the entity entered into the contract. IFRS 15.98 then lists four categories that are expensed when incurred whatever else is true: general and administrative costs, wasted materials and labour, costs relating to satisfied performance obligations, and costs the entity cannot attribute between satisfied and unsatisfied obligations. The two lists are not symmetrical and IFRS 15.98 wins where they collide.
"Costs that relate directly to a contract (or a specific anticipated contract) include any of the following: (a) direct labour (for example, salaries and wages of employees who provide the promised services directly to the customer); (b) direct materials (for example, supplies used in providing the promised services to a customer); (c) allocations of costs that relate directly to the contract or to contract activities (for example, costs of contract management and supervision, insurance and depreciation of tools, equipment and right-of-use assets 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 (for example, payments to subcontractors)."
The word "include" tells you the list is not exhaustive. It is a description of what "relate directly" means rather than a closed set, so a cost outside the five categories can still qualify if it genuinely relates directly. But the categories are informative in what they permit. Sub-paragraph (c) admits allocations, which is significant, because it means an entity is not restricted to costs that are traceable to the contract one for one. Contract management, supervision, insurance and the depreciation of shared tools can be allocated in.
Sub-paragraph (c) also names right-of-use assets expressly. That is a small piece of drafting with a practical consequence: depreciation on a leased asset used in fulfilling a contract is a directly related cost, so an entity delivering a contract from leased premises or leased equipment can allocate that depreciation. What it cannot do is capitalise the lease payments themselves under IFRS 15, because IFRS 16 has jurisdiction over the lease and IFRS 15.96 sends it there.
Sub-paragraph (d) is the one most often misread. It says costs explicitly chargeable to the customer are costs that relate directly to the contract. It does not say they are capitalised. The IFRS 15.95 criteria still have to be met and IFRS 15.96 still has to be cleared, which is precisely the point the Interpretations Committee made about training costs in Unit 6. IFRS 15.97 populates the category. It does not open the gate.
"An entity shall recognise the following costs as expenses when incurred: (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 paragraph 97); (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 performance obligations (or partially satisfied performance obligations) in the contract (ie 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 performance obligations (or partially satisfied performance obligations)."
Each of the four does different work. Sub-paragraph (a) removes the corporate overhead that IFRS 15.97(c) might otherwise seem to admit through the word "allocations", and it carries the only exception in the list: general and administrative costs that are explicitly chargeable to the customer go back to IFRS 15.97 for evaluation. Note the drafting, "evaluate those costs in accordance with paragraph 97". Not capitalise. Evaluate.
Sub-paragraph (b) removes waste. The qualifier "that were not reflected in the price of the contract" matters, because normal expected wastage priced into the contract is not abnormal waste and forms part of the cost of delivering what was promised. It is unpriced overruns that are expensed. This is the paragraph that stops an entity capitalising the cost of a failed installation and recovering it over the remaining term.
Sub-paragraph (c) is the forward-looking test in IFRS 15.95(b) restated as a prohibition, and it is the paragraph the Interpretations Committee relied on in its June 2019 agenda decision. Costs relating to past performance are expensed. Sub-paragraph (d) then closes the obvious escape route: where the entity cannot tell whether a cost relates to past or future performance, the answer is expense. The burden of proof runs against capitalisation.
The collision cases
Three combinations produce arguments, and in each the correct resolution runs the same way.
| Cost | The IFRS 15.97 argument | The IFRS 15.98 answer | Resolution |
|---|---|---|---|
| Contract management salaries for the delivery phase already completed | 97(a) direct labour, or 97(c) allocation of contract management | 98(c) relates to a partially satisfied performance obligation | Expense. 15.98 is drafted as a mandatory expensing list and 15.95(b) independently requires a future resource |
| Rework on a defective installation, cost not priced in | 97(a) and 97(b) direct labour and materials on the contract | 98(b) wasted materials, labour or other resources not reflected in the price | Expense. Directness is not the test once waste is identified |
| Head office finance support recharged to the contract under a cost-plus clause | 97(d) explicitly chargeable to the customer | 98(a) general and administrative costs, subject to the chargeable carve-out | Evaluate under 15.97, then still test IFRS 15.95(a), (b) and (c). Chargeability alone does not capitalise it |
| Depreciation of a leased delivery vehicle used on the contract | 97(c) depreciation of right-of-use assets used in fulfilling the contract | None | Directly related cost. It enters the IFRS 15.101(b) deduction and can be allocated into a fulfilment asset where 15.95 is met. The lease liability itself stays in IFRS 16 |
| Unallocatable pool of delivery costs spanning completed and future phases | 97(c) allocation | 98(d) cannot distinguish satisfied from unsatisfied | Expense the whole pool, unless the entity can build an allocation it can defend |
The pattern is consistent. IFRS 15.98 is drafted in mandatory terms, "shall recognise the following costs as expenses when incurred", and it is not qualified by IFRS 15.97 except in the single carve-out in 98(a). IFRS 15.97 is definitional and permissive. Where a cost appears in both lists, the mandatory expensing wins.
Practitioner note
IFRS 15.98(d) is the most under-used paragraph in this section and the most useful one on review. Ask the preparer to demonstrate, for the largest single component of the fulfilment asset, that the cost relates to performance obligations not yet satisfied. If the answer is a percentage allocation with no underlying basis, 98(d) applies on its own terms and the whole component is an expense. This is a much cleaner challenge than arguing about whether the cost is direct, because it puts the evidential burden where the standard puts it.
Allocating a single asset across multiple performance obligations
Where the cost asset relates to more than one performance obligation, IFRS 15 does not prescribe how to split it. IFRS 15.99 requires the amortisation to be consistent with the transfer of the goods or services to which the asset relates, and that leaves two broad approaches. The entity can allocate the asset among the distinct goods or services, for example on a relative stand-alone selling price basis or on the basis of the margin expected from each, and amortise each portion over its own transfer pattern. Or it can use a single measure of progress covering all of the goods or services the asset relates to. Where the asset clearly relates only to some of the obligations, allocating it entirely to those is reasonable and is usually the most faithful answer.
The choice matters most where one obligation is satisfied at a point in time and another over a long period. A commission on a contract combining a day-one equipment delivery with a five year service, allocated on relative stand-alone selling prices, produces a large immediate charge and a small tail. The same commission run through a single time-based measure of progress produces a level charge across five years. Both can be systematic. Only one will be consistent with the transfer on any given set of facts, and the entity has to say which it has chosen under IFRS 15.127(b). The mechanics of splitting on relative stand-alone selling prices are set out in the note on transaction price allocation.
No symmetry with upfront fees. A non-refundable upfront fee is an advance payment for future goods or services under IFRS 15.B49, and the recognition period extends beyond the initial contractual period only where a renewal option gives the customer a material right as described in IFRS 15.B40. A contract cost asset is amortised over the period of transfer of the goods or services to which it relates, including specifically anticipated contracts. Those two periods are set by different tests and there is no requirement in the standard that they match. An entity that deferred an activation fee over three years and amortises the related commission over five years has not made an error by that fact alone, and an entity that forces the two periods to align because it looks tidier has substituted symmetry for analysis. IFRS 15.B51 confirms the direction of travel: it requires set-up activities and their related costs to be disregarded when measuring progress, and then sends the entity to paragraph 95 to assess whether those set-up costs have produced an asset. The revenue side and the cost side are decided separately.
Local FAQs
Can an entity allocate general overhead into a contract fulfilment asset? Only the part that is an allocation of costs relating directly to the contract or to contract activities under IFRS 15.97(c). Contract management, supervision, contract-specific insurance and depreciation of tools used on the contract qualify. Corporate finance, group HR, legal and central IT do not, because IFRS 15.98(a) removes general and administrative costs. The line is whether the cost relates to contract activities or to running the entity.
Are pre-contract design costs on a bid the entity expects to win capitalised? They can be, under IFRS 15.95(a), which names design costs for a contract not yet approved. But they must also generate or enhance a resource under 15.95(b) and be expected to be recovered under 15.95(c), and they must not be within another Standard. Design work that produces a deliverable the entity will transfer usually qualifies. Time spent preparing a proposal document does not, because it produces no resource used in satisfying a future performance obligation.
Does capitalising fulfilment costs change the measure of progress for revenue? No, and the two must not be allowed to interact. Where the entity uses an input method based on costs incurred, IFRS 15.B19 requires an adjustment where a cost incurred is not proportionate to progress, and a cost capitalised as a fulfilment asset has not yet been consumed in satisfying the obligation. Feeding capitalised set-up costs into a cost-to-cost calculation accelerates revenue on a cost the entity has itself concluded relates to future performance, which is internally contradictory.
Potential risks
The risk is a fulfilment asset that grows without an amortisation counterpart. A balance that increases every period while the contract is being delivered is a signal that costs relating to past performance are being added, which IFRS 15.98(c) prohibits, or that amortisation is not keeping pace with transfer, which IFRS 15.99 requires. The simplest analytical review is to plot the asset balance against the proportion of the contract delivered. On a contract half delivered, a fulfilment asset at or above its peak needs an explanation, and "the contract is complex" is not one.
8. What happens when the expected timing changes, and how does IFRS 15.100 work in practice?
IFRS 15.100 requires the amortisation to be updated to reflect a significant change in the entity's expected timing of transfer of the goods or services to which the asset relates, and to account for that change as a change in accounting estimate under IAS 8. Prospective, not retrospective. No restatement of comparatives and no catch-up charge to opening reserves. The remaining carrying amount is spread over the revised remaining period, and the effect lands in the current and future periods.
"An entity shall update the amortisation to reflect a significant change in the entity's expected timing of transfer to the customer of the goods or services to which the asset relates. Such a change shall be accounted for as a change in accounting estimate in accordance with IAS 8."
Three points of drafting. The trigger is a change in expected timing, not a change in expected profitability. A contract that has become less profitable but will transfer over the same period does not trigger IFRS 15.100. It may trigger the impairment test in IFRS 15.101, which is a separate mechanism dealt with in Unit 9. Confusing the two produces the wrong entry in the wrong line of profit or loss.
The threshold is "significant". IFRS 15 does not quantify it, and the practical effect is that entities running portfolio-level estimates reassess periodically rather than continuously. Annual reassessment of the churn assumption underlying an amortisation period, supported by the current year's actual retention data, is a defensible cadence for most businesses. Quarterly is required where the underlying behaviour is volatile.
The classification as a change in estimate matters, because IAS 8.36 requires the effect of a change in estimate to be recognised prospectively in the period of the change and future periods. Restating prior periods for a revised churn assumption is a misapplication of IAS 8 and would in most cases also be a change in the wrong direction, since it substitutes hindsight for the information available at the earlier date.
Worked mechanics of a period change
Return to the contract in Unit 4. The entity capitalised CU 36,000 at inception and amortised it over four years at CU 9,000 a year. At the end of year two the carrying amount is CU 18,000. During year three the entity's retention data deteriorates and it concludes that the specifically anticipated renewal will now run for one further year rather than two, so the total expected transfer period falls from four years to three.
IFRS 15.100 requires the amortisation to be updated prospectively. The carrying amount at the start of year three of CU 18,000 is spread over the revised remaining transfer period of one year. The charge in year three becomes CU 18,000 rather than CU 9,000, and the asset is fully amortised at the end of year three. Years one and two are not touched.
| Year | Original 4 year basis | Revised basis after the year 3 reassessment | Carrying amount, revised basis |
|---|---|---|---|
| Year 1 | 9,000 | 9,000 as reported | 27,000 |
| Year 2 | 9,000 | 9,000 as reported | 18,000 |
| Year 3 | 9,000 | 18,000 | nil |
| Year 4 | 9,000 | nil | nil |
| Total | 36,000 | 36,000 |
Both columns total CU 36,000, which is the point of a prospective change: the total charge is unaltered and only its distribution moves. The additional CU 9,000 charged in year three is not an impairment loss and should not be presented or disclosed as one. It is amortisation. IFRS 15.128(b) requires the amount of amortisation and any impairment losses recognised in the period to be disclosed separately, so mislabelling the catch-up puts the wrong number in the wrong line of the note.
Do not run IFRS 15.100 and IFRS 15.101 as a single adjustment. A deteriorating contract usually presents both a shorter expected transfer period and a lower expected consideration. The correct sequence is to revise the amortisation first, because that determines the carrying amount at which the asset is then tested, and then to apply the impairment test to the revised carrying amount. Running them together produces a single number that cannot be split between the amortisation line and the impairment line for the IFRS 15.128(b) disclosure, and it obscures which driver moved.
Presentation of the amortisation charge
IFRS 15 does not say where the amortisation of a contract cost asset goes in profit or loss. IFRS 15.128(b) requires the amount to be disclosed, which forces it into the notes, but the face of the statement is left open. Where an entity presents expenses by function, the natural home for amortisation of a costs-to-obtain asset is selling and distribution, because the underlying cost is a selling cost, and the natural home for amortisation of a costs-to-fulfil asset is cost of sales, because the underlying cost is a delivery cost. Where an entity presents by nature the question is harder, because the amortisation of a contract cost asset does not obviously match any of the usual nature captions.
Two things constrain the choice. IAS 1.32 prohibits offsetting unless required or permitted, so contract cost amortisation cannot be netted against revenue. And the general requirement that presentation is not misleading applies, which rules out a presentation that moves a selling cost out of operating expenses to improve an operating margin subtotal. For periods beginning on or after 1 January 2027 IFRS 18 replaces IAS 1 and introduces mandatory categories and subtotals in the statement of profit or loss, which will make the classification of contract cost amortisation a more visible decision than it is today.
Practitioner note
The reassessment under IFRS 15.100 is the control that keeps the amortisation period honest, and it is the one most often missing. Where an entity has capitalised commissions on a five year expected life, ask to see the year-on-year comparison of the assumed retention rate against actual retention. If actual retention has been below assumed retention for two consecutive years and the period has not moved, either the assumption is wrong or the reassessment is not happening. This is a straightforward test to run and it produces a straightforward answer.
Local FAQs
Is a change in the amortisation period a change in policy or a change in estimate? IFRS 15.100 answers this directly: a change in estimate under IAS 8, accounted for prospectively. A change in the method used to determine amortisation, for example moving from a single measure of progress to an allocation across performance obligations, is a change in accounting policy under IAS 8.14 and is a different question with different consequences.
Does an increase in the expected period reverse prior amortisation? No. IFRS 15.100 is prospective in both directions. Where the expected transfer period lengthens, the remaining carrying amount is spread over the longer remaining period and the annual charge falls. Amounts already charged stay charged. The only mechanism that puts an amount back on the balance sheet is the impairment reversal in IFRS 15.104, and that reverses impairment, not amortisation.
What if the customer terminates part way through? The expected transfer period has changed to nil for the terminated element, so IFRS 15.100 applies and the remaining carrying amount attributable to that element is charged immediately. Where the termination also triggers a compensation payment, that is consideration and it feeds the IFRS 15.101 test rather than reducing the amortisation charge. The distinction between the two is set out in Unit 9, and where a termination arises from a modification rather than a cancellation the analysis in the note on contract modifications comes first.
Potential risks
The risk is a static estimate presented as a policy. An amortisation period disclosed as "five years" in the accounting policy note reads like a policy and behaves like one, in the sense that nobody expects a policy to change. IFRS 15.127(b) asks for the method used to determine amortisation, which is a better framing, because a method has inputs and inputs get revisited. A note that explains the period is derived from expected customer retention, and that the retention assumption is reassessed annually, tells the reader something a bare number does not, and it creates an internal expectation that the reassessment will actually occur.
9. What is the correct impairment sequence for a contract cost asset, and what goes wrong if you run it out of order?
IFRS 15.103 puts the other Standards first. Impair the IAS 2, IAS 16 and IAS 38 assets related to the contract before touching the contract cost asset. Then apply IFRS 15.101, comparing the carrying amount with remaining expected consideration less remaining directly related costs, measuring the consideration under IFRS 15.102 by using the transaction price principles but excluding the constraint in IFRS 15.56 to 15.58 and adjusting for the customer's credit risk. Then, still under IFRS 15.103, include the resulting carrying amount in the cash-generating unit for IAS 36 purposes. Running the test before the other Standards double counts, because the pre-impairment carrying amounts of the other assets inflate the costs deducted in IFRS 15.101(b).
"An entity shall recognise an impairment loss in profit or loss to the extent that the carrying amount of an asset recognised in accordance with paragraph 91 or 95 exceeds: (a) the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates; less (b) the costs that relate directly to providing those goods or services and that have not been recognised as expenses (see paragraph 97)."
This is not the IAS 36 model. There is no value in use calculation, no discounting requirement stated in the paragraph, no fair value less costs of disposal, and no cash-generating unit at this stage. It is a simple two-line comparison: what is still coming in, less what still has to be spent to earn it. The result is a ceiling, and the carrying amount is written down to that ceiling.
Two words control the scope of both limbs. In (a), "the goods or services to which the asset relates" ties the consideration to the same population that fixed the amortisation period under IFRS 15.99. If the amortisation period includes a specifically anticipated renewal, the consideration expected from that renewal is in limb (a). An entity cannot amortise over four years and then test against two years of consideration. In (b), the cross-reference to paragraph 97 fixes what can be deducted. It is the directly related costs, not every cost the entity will incur, and it is only the portion not yet expensed.
"For the purposes of applying paragraph 101 to determine the amount of consideration that an entity expects to receive, an entity shall use the principles for determining the transaction price (except for the requirements in paragraphs 56-58 on constraining estimates of variable consideration) and adjust that amount to reflect the effects of the customer's credit risk."
Two deliberate departures from the revenue number, running in opposite directions. Excluding the constraint pushes the amount up, because the entity includes its full estimate of variable consideration even where the constraint would have held it back from revenue. Adjusting for credit risk pushes the amount down, because the transaction price for revenue purposes is not reduced for the risk that the customer will not pay, whereas the impairment test is.
The logic is coherent once you see what each test is for. The constraint exists to stop revenue being recognised and then reversed, which is a concern about the reliability of a reported gain. An impairment test is not measuring a gain, it is measuring whether an asset will be covered, so the constrained portion is real economic consideration and belongs in the calculation. Credit risk runs the other way: revenue is measured before credit risk because expected credit losses are dealt with under IFRS 9, but the recoverability of a contract cost asset does depend on whether the customer actually pays.
The practical consequence is that the consideration figure in the IFRS 15.101 test will not agree to the transaction price in the revenue working papers, and it should not. A file that uses the transaction price unadjusted has skipped IFRS 15.102 in both directions. The variable consideration mechanics that are being unwound here are covered in the note on variable consideration and the constraint.
"Before an entity recognises an impairment loss for an asset recognised in accordance with paragraph 91 or 95, the entity shall recognise any impairment loss for assets related to the contract that are recognised in accordance with another Standard (for example, IAS 2, IAS 16 and IAS 38). After applying the impairment test in paragraph 101, an entity shall include the resulting carrying amount of the asset recognised in accordance with paragraph 91 or 95 in the carrying amount of the cash-generating unit to which it belongs for the purpose of applying IAS 36 Impairment of Assets to that cash-generating unit."
One paragraph, two sentences, and they bracket the IFRS 15.101 test on either side. The first sentence is the entry condition: other Standards first. The second sentence is the exit: whatever survives goes into the CGU. It is common to see the second sentence cited as paragraph 104, which is a different paragraph dealing with reversal, so the reference is worth getting right in a working paper.
The reason for the ordering in the first sentence is arithmetic rather than conceptual. The costs deducted in IFRS 15.101(b) include the consumption of the other assets: the depreciation of the contract-specific equipment, the carrying amount of the contract-specific inventory that will be used. Those are directly related costs under IFRS 15.97(b) and 15.97(c). If the other assets have not yet been written down, the amounts deducted are their pre-impairment carrying amounts, which are too high. Too high a deduction produces too low a ceiling, which produces too large an impairment of the contract cost asset. The entity then still has to write the other assets down, so the same economic loss is charged twice.
The second sentence closes the loop with IAS 36. The contract cost asset is not tested for impairment under IAS 36 in its own right, but it is not invisible to IAS 36 either. It goes into the carrying amount of the CGU. Leaving it out understates the CGU carrying amount and can cause a CGU impairment to be missed.
Worked example 3: the same facts run in both orders
An entity is two years into a five year contract. The following is an arithmetic example constructed for illustration, in currency units. At the reporting date the contract-related balances and forecasts are as follows.
| Item | Amount | Reference |
|---|---|---|
| Contract cost asset, costs to obtain | 90,000 | IFRS 15.91 |
| Contract cost asset, costs to fulfil | 210,000 | IFRS 15.95 |
| Total IFRS 15 contract cost assets | 300,000 | |
| Contract-specific equipment, carrying amount | 160,000 | IAS 16, recoverable amount 100,000 |
| Contract-specific inventory, carrying amount | 50,000 | IAS 2, net realisable value 38,000 |
| Fixed consideration remaining over years 3 to 5 | 400,000 | IFRS 15.102 |
| Variable performance bonus, expected value | 60,000 | Only 20,000 would survive the IFRS 15.56 to 15.58 constraint |
| Expected credit shortfall, 5% of the gross expected amount | (23,000) | IFRS 15.102 credit risk adjustment |
| Direct labour to complete | 190,000 | IFRS 15.97(a) |
| Subcontractor payments to complete | 60,000 | IFRS 15.97(e) |
The correct order
Step 1, IFRS 15.103 first sentence. Write the inventory down to net realisable value under IAS 2, a charge of CU 50,000 less CU 38,000, being CU 12,000. Impair the equipment under IAS 36 from CU 160,000 to its recoverable amount of CU 100,000, a charge of CU 60,000. Total charge in step 1 is CU 72,000.
Step 2, IFRS 15.101 with IFRS 15.102. Consideration under limb (a): CU 400,000 fixed plus the full CU 60,000 variable, because IFRS 15.102 excludes the constraint, giving CU 460,000 gross, less the credit risk adjustment of 5%, which is CU 23,000, giving CU 437,000. Directly related costs not yet expensed under limb (b): direct labour CU 190,000, subcontractors CU 60,000, consumption of the written-down inventory CU 38,000, and depreciation of the equipment over years 3 to 5 at its post-impairment carrying amount of CU 100,000. Total CU 388,000.
| Line | Amount |
|---|---|
| Fixed consideration remaining | 400,000 |
| Variable consideration at expected value, constraint excluded per IFRS 15.102 | 60,000 |
| Gross expected consideration | 460,000 |
| Credit risk adjustment at 5% per IFRS 15.102 | (23,000) |
| IFRS 15.101(a) remaining consideration expected | 437,000 |
| Direct labour to complete, IFRS 15.97(a) | (190,000) |
| Direct materials, being the written-down inventory, IFRS 15.97(b) | (38,000) |
| Subcontractor payments, IFRS 15.97(e) | (60,000) |
| Depreciation of the impaired equipment over years 3 to 5, IFRS 15.97(c) | (100,000) |
| IFRS 15.101(b) directly related costs not yet expensed | (388,000) |
| Ceiling for the contract cost assets | 49,000 |
| Carrying amount of the contract cost assets | 300,000 |
| IFRS 15.101 impairment loss | 251,000 |
Check the arithmetic: CU 400,000 plus CU 60,000 is CU 460,000, less CU 23,000 is CU 437,000. CU 190,000 plus CU 38,000 plus CU 60,000 plus CU 100,000 is CU 388,000. CU 437,000 less CU 388,000 is CU 49,000. CU 300,000 less CU 49,000 is CU 251,000.
IFRS 15 does not say how to split the loss between the paragraph 91 asset and the paragraph 95 asset, and an entity has to choose and disclose a basis. Allocating pro rata to carrying amount gives CU 90,000 divided by CU 300,000 multiplied by CU 251,000, which is CU 75,300 against the costs-to-obtain asset, and CU 210,000 divided by CU 300,000 multiplied by CU 251,000, which is CU 175,700 against the costs-to-fulfil asset. Those two figures sum to CU 251,000.
Step 3, IFRS 15.103 second sentence. The surviving CU 49,000 is included in the carrying amount of the cash-generating unit to which the contract belongs for the purpose of the IAS 36 test on that unit. It is not tested again on its own.
| Step | Account | Dr | Cr |
|---|---|---|---|
| 1 | Cost of sales, inventory write-down (IAS 2) | 12,000 | |
| 1 | Inventories | 12,000 | |
| 1 | Impairment of property, plant and equipment (IAS 36) | 60,000 | |
| 1 | Property, plant and equipment | 60,000 | |
| 2 | Impairment of contract cost assets (IFRS 15.101) | 251,000 | |
| 2 | Contract cost asset, costs to obtain | 75,300 | |
| 2 | Contract cost asset, costs to fulfil | 175,700 | |
| Total | 323,000 | 323,000 |
The wrong order, and what it costs
Now run IFRS 15.101 first, before the IAS 2 and IAS 16 write-downs. The consideration side does not move: it is still CU 437,000. The cost side does move, because the costs still to be incurred are now measured using the pre-impairment carrying amounts. Direct materials become the inventory at book cost of CU 50,000 rather than net realisable value of CU 38,000, and the depreciation of the equipment over years 3 to 5 becomes CU 160,000 rather than CU 100,000.
| Line | Correct order | Wrong order |
|---|---|---|
| IFRS 15.101(a) remaining consideration expected | 437,000 | 437,000 |
| Direct labour to complete | (190,000) | (190,000) |
| Direct materials | (38,000) | (50,000) |
| Subcontractor payments | (60,000) | (60,000) |
| Depreciation of the equipment | (100,000) | (160,000) |
| IFRS 15.101(b) total | (388,000) | (460,000) |
| Ceiling | 49,000 | (23,000) |
| Carrying amount of contract cost assets | 300,000 | 300,000 |
| IFRS 15.101 impairment loss | 251,000 | 300,000, the ceiling being negative |
| IAS 2 and IAS 16 losses still to be recognised afterwards | 72,000, already taken in step 1 | 72,000 |
| Total charged to profit or loss | 323,000 | 372,000 |
| Overstatement of the loss | 49,000 |
The overstatement of CU 49,000 is exactly the ceiling that should have survived. That is not a coincidence of these numbers. Deducting the other assets at their pre-impairment carrying amounts charges their impairment through limb (b) of the IFRS 15.101 test, and the entity then charges it again when it applies IAS 2 and IAS 36 to those assets. The double count is capped at the amount by which the contract cost asset would otherwise have survived, which here is the whole of it.
There is a second, subtler consequence. In the wrong order the ceiling is negative CU 23,000, which looks like a signal that the contract is onerous and prompts an IAS 37 assessment that the facts do not support. In the correct order the ceiling is positive CU 49,000 and no such signal arises. A sequencing error therefore does not just misstate the loss, it can manufacture a provision. IFRS 15 contains no onerous contract guidance, so the assessment would be made under IAS 37, where IAS 37.68A confirms that the cost of fulfilling a contract comprises the costs that relate directly to the contract. That analysis is set out in the note on IAS 37 onerous contracts.
The third failure mode runs the other way. An entity that applies IFRS 15.101 correctly but forgets the second sentence of IFRS 15.103 leaves the surviving CU 49,000 outside the CGU carrying amount when it performs the IAS 36 test. The CGU is then understated by CU 49,000, and a CGU impairment that should have been recognised can be missed. All three failure modes come from treating IFRS 15.103 as a footnote rather than as the paragraph that sequences the whole exercise.
"An entity shall recognise in profit or loss a reversal of some or all of an impairment loss previously recognised in accordance with paragraph 101 when the impairment conditions no longer exist or have improved. The increased carrying amount of the asset shall not exceed the amount that would have been determined (net of amortisation) if no impairment loss had been recognised previously."
Reversal is required, not permitted, when the conditions improve. That is a material difference from goodwill, where IAS 36.124 prohibits reversal, and it is a difference preparers forget because impairment reversal is unfamiliar territory in most groups. If the customer in the example above is upgraded, or the variable performance bonus becomes more likely, or a cost overrun is resolved, the entity has to revisit the CU 251,000.
The cap is the amount that would have been determined net of amortisation had no impairment been recognised. That requires the entity to maintain a shadow amortisation schedule on the pre-impairment carrying amount for as long as the asset exists, which is a systems requirement rather than a technical one and is the reason reversals are so often missed in practice. Nobody keeps the schedule, so nobody can compute the cap, so nobody reverses.
Local FAQs
Is the IFRS 15.101 calculation discounted? The paragraph does not require discounting and does not mention it. Where the contract contains a significant financing component, the transaction price principles referred to in IFRS 15.102 include the adjustment for that component under IFRS 15.60, so the effect enters through the consideration measurement rather than through a separate discounting step on the whole calculation.
Does the IFRS 15.101 test look at the whole contract or just the goods or services the asset relates to? Just the goods or services the asset relates to. Both limbs are drafted that way. Where the asset relates to a specifically anticipated renewal because that is the amortisation period set under IFRS 15.99, the renewal's consideration and its directly related costs are both in the test. Consistency between the amortisation period and the impairment population is the single most useful cross-check in this area.
What if the contract cost asset survives IFRS 15.101 but the CGU is impaired? Then the asset takes its share of the CGU impairment under the IAS 36 allocation rules in IAS 36.104, after goodwill has been eliminated. It is not protected by having passed the IFRS 15.101 test. The two tests operate at different levels and both apply.
Potential risks
The risk that matters is that nobody performs the test at all. IFRS 15.101 has no explicit trigger, no indicator list of the kind IAS 36.12 provides, and no annual test requirement. It simply says an entity shall recognise an impairment loss to the extent the carrying amount exceeds the ceiling, which means the assessment is continuous. In practice entities need a trigger framework of their own: contract loss-making on latest forecast, customer credit deterioration, scope reduction, an amortisation period reassessment under IFRS 15.100, or a churn rate materially above assumption. Without one, the balance is tested only when something forces the question, and by then the loss is usually larger and the discussion is about a prior period error rather than a current period estimate.
What have regulators and the Interpretations Committee said about contract costs?
Contract costs have attracted more standard-setter attention than their length in the standard suggests. The IFRS Interpretations Committee issued two agenda decisions on the costs to fulfil gate, in June 2019 and March 2020, and both narrowed practice rather than widened it. The Financial Reporting Council's September 2020 follow-up thematic review found the disclosure side largely absent.
The two agenda decisions matter because they are the closest thing to authoritative interpretation available on IFRS 15.95. The June 2019 decision, Costs to Fulfil a Contract, addressed costs incurred at the start of a contract where revenue is recognised over time, and worked through the IFRS 15.95 criteria in sequence rather than treating them as a general "matching" permission. The March 2020 decision, Training Costs to Fulfil a Contract, dealt with training costs incurred so that staff can deliver a contracted service, and reached a restrictive answer by routing the question through IAS 38 before IFRS 15 could be reached at all. That routing is IFRS 15.96 doing its work, and it is the structural point of unit 6 above.
The practical reading of both decisions is the same. The costs to fulfil gate is not a residual bucket for expenditure a company would like to defer. It is a narrow gate that opens only after every other Standard has declined the cost, and then only if all three of the IFRS 15.95 criteria are met. Where a company is capitalising set-up, mobilisation, migration or training costs, the file needs to show the IAS 2, IAS 16 and IAS 38 analysis first, and the paragraph 95 analysis second. A file that starts at IFRS 15.95 has skipped the step that the Committee twice said was determinative.
Regulator finding: contract cost disclosure in practice
The Financial Reporting Council's follow-up thematic review of IFRS 15 reporting, published in September 2020 alongside its IFRS 16 review, reported concern at the lack of information disclosed about contract costs by companies whose activities suggested contract costs would be relevant. The review noted that costs to obtain a contract predominantly comprise sales commission costs. The gap it identified is not a measurement gap but an explanatory one: where a company pays commissions on multi-year contracts and its notes are silent, a reader cannot tell whether the amounts were capitalised, whether the IFRS 15.94 expedient was applied, or what amortisation period was used and why.
Financial Reporting Council, thematic review of IFRS 15 and IFRS 16 reporting, September 2020.IFRS 15.127 is the requirement that closes that gap. It calls for the closing balances of assets recognised from the costs to obtain or fulfil a contract, by main category of asset, and the amortisation and any impairment losses recognised in the period. IFRS 15.128 adds the judgements made in determining the amounts and the method used to determine amortisation. Read together they ask for the amortisation period and its basis, which is exactly the judgement that units 4 and 5 above show to be capable of moving the numbers materially. A note that gives a closing balance and nothing else technically starts the disclosure and does not finish it.
Where this becomes an audit issue. An amortisation period that looks through to anticipated renewals under IFRS 15.99 is a judgement about future customer behaviour. It extends the asset's life, reduces current period expense and increases the carrying amount. It is therefore an estimate with a directional bias, and one that IFRS 15.128 requires to be explained. If the period cannot be supported by churn or renewal data, the safer conclusion is the shorter period, not the longer one.
Five ways contract cost accounting goes wrong
- Treating capitalisation as a policy choice. IFRS 15.91 uses "shall recognise as an asset". There is no election. The only route to expensing an incremental cost of obtaining a contract is the IFRS 15.94 practical expedient, and that expedient is available only where the amortisation period of the asset that would otherwise have been recognised is one year or less. A policy note that says the group "has elected to expense sales commissions as incurred" is describing an accounting treatment the standard does not offer unless the expedient is available and has been tested.
- Defaulting the amortisation period to the contract term. IFRS 15.99 amortises on a basis consistent with the transfer of the goods or services to which the asset relates, and expressly contemplates that the asset may relate to a specific anticipated contract under IFRS 15.95(a). Where no commission is paid on renewal, the initial commission is generally relating to the renewal periods as well, and a two year contract term can support a materially longer period. Anchoring to the stated term is not a conservative simplification. It is a different answer.
- Applying the renewal look-through in every case. The mirror error. Where a renewal commission is paid and is commensurate with the initial commission, the initial commission relates only to the initial contract, and extending the amortisation period overstates the asset and understates current period cost. The question is not whether renewals are expected, it is whether the initial payment relates to them.
- Starting the fulfilment cost analysis at IFRS 15.95. IFRS 15.96 subordinates the entire costs to fulfil gate to other Standards. Inventory goes to IAS 2, equipment to IAS 16, intangibles to IAS 38, and only what those decline reaches paragraph 95. Both the June 2019 and March 2020 IFRS Interpretations Committee agenda decisions turned on this routing. A file that opens at paragraph 95 has skipped the determinative step.
- Running the impairment test in the intuitive order, and using the constrained transaction price. Two errors that usually travel together. IFRS 15.103 requires impairment under other Standards to be recognised first, then IFRS 15.101 applies, then IFRS 15.104 puts the residue into the cash-generating unit for IAS 36. Separately, IFRS 15.102 measures the recoverable consideration using the transaction price principles but expressly excludes the constraint in IFRS 15.56 to 15.58 and adjusts for credit risk. Using the constrained revenue figure understates the recoverable amount and produces an impairment the standard does not require.
IFRS 15 contract costs: frequently asked questions
Can sales commissions be capitalised under IFRS 15?
Yes, and in most cases it is mandatory rather than optional. IFRS 15.91 says an entity "shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs". A sales commission is the standard's own example of such a cost in IFRS 15.92. The only route to expensing is the practical expedient in IFRS 15.94, available where the amortisation period of the asset would have been one year or less. Treating capitalisation as an accounting policy choice is a misreading of the paragraph.
What are incremental costs of obtaining a contract?
IFRS 15.92 defines them as costs the entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The test is counterfactual and contract-specific. A commission payable only on a signed contract qualifies. A salary paid to the same salesperson regardless of outcome does not, and IFRS 15.93 requires it to be expensed as incurred unless it is explicitly chargeable to the customer whether or not the contract is obtained.
Over what period should a capitalised sales commission be amortised?
Not automatically the contract term. IFRS 15.99 requires amortisation on a systematic basis consistent with the transfer of the goods or services to which the asset relates, and it states expressly that the asset may relate to goods or services to be transferred under a specific anticipated contract as described in IFRS 15.95(a). Where a two year contract is expected to renew and no new commission is paid on renewal, the period that reflects the transfer of the related services can be materially longer than two years. Using the stated contract term by default is one of the most common errors in this area.
Can I expense commissions instead of capitalising them?
Only through IFRS 15.94, which permits recognition as an expense when incurred if the amortisation period of the asset the entity otherwise would have recognised is one year or less. Note what the expedient tests. It is the amortisation period, not the contract term. A one year contract that is expected to renew, with the commission relating to the anticipated renewals under IFRS 15.99, can have an amortisation period longer than a year, which closes the expedient off.
What is the difference between costs to obtain and costs to fulfil a contract?
They are two separate gates with different drafting. Costs to obtain, in IFRS 15.91 to 15.94, cover only incremental costs and carry a single recognition criterion, expected recovery. Costs to fulfil, in IFRS 15.95 to 15.98, are subordinate: IFRS 15.96 requires costs within the scope of another Standard such as IAS 2, IAS 16 or IAS 38 to be accounted for under that Standard first, and only what those decline reaches the three cumulative criteria in IFRS 15.95(a), (b) and (c).
Are bid, tender and legal costs capitalised under IFRS 15?
Usually not. Bid preparation, tender costs, legal due diligence and travel are typically incurred whether or not the contract is won, so they fail the counterfactual test in IFRS 15.92 and are expensed under IFRS 15.93. The exception in IFRS 15.93 is narrow: costs explicitly chargeable to the customer regardless of whether the contract is obtained. A success fee payable only on award is a different matter and can qualify as incremental.
How is a contract cost asset impaired under IFRS 15?
Through a prescribed sequence that runs in a counter-intuitive order. IFRS 15.103 requires the entity to recognise any impairment for related assets under other Standards first, for example IAS 2, IAS 16 and IAS 38. IFRS 15.101 then compares the carrying amount to the remaining consideration expected less the directly related costs not yet recognised as expenses. IFRS 15.104 then puts the remaining carrying amount into the cash-generating unit for IAS 36 purposes. Running that sequence out of order misstates the loss.
Is the transaction price used in the contract cost impairment test the same as the transaction price used for revenue?
No, and this catches people out. IFRS 15.102 says the entity uses the principles for determining the transaction price but expressly excludes the requirements in IFRS 15.56 to 15.58 on constraining estimates of variable consideration, and then adjusts the amount to reflect the customer's credit risk. Using the constrained revenue figure understates the recoverable consideration and can manufacture an impairment that the standard does not require.
Do commissions paid on contract renewals get capitalised?
If the renewal commission is itself incremental to obtaining the renewal, it is capitalised under IFRS 15.91 in its own right. The harder question is the initial commission. Where a renewal commission is paid and is commensurate with the initial commission, the initial commission relates only to the initial contract and the look-through to renewals in IFRS 15.99 is not appropriate. Where no renewal commission is paid, or it is not commensurate, the initial commission is generally understood to relate to the anticipated renewal periods as well.
What disclosures are required for contract costs?
IFRS 15.127 requires the closing balances of assets recognised from the costs to obtain or fulfil a contract, by main category of asset, and the amount of amortisation and any impairment losses recognised in the period. IFRS 15.128 requires a description of the judgements made in determining the amount of the costs and the method used to determine amortisation. The FRC's September 2020 follow-up thematic review found that a substantial majority of companies in its sample gave no contract cost policy at all.
Key takeaways
- IFRS 15 has no general cost model. It has two narrow gates, at IFRS 15.91 to 15.94 for incremental costs of obtaining a contract and IFRS 15.95 to 15.98 for fulfilment costs outside every other Standard, and IFRS 15.8 limits both to contracts within the scope of the standard.
- Capitalising an incremental cost of obtaining a contract is mandatory where recovery is expected. The IFRS 15.94 expedient is the only exit and it tests the amortisation period, not the contract term.
- "Incremental" under IFRS 15.92 is a counterfactual test. If the cost would have been incurred whether or not the contract was won, IFRS 15.93 expenses it, subject only to the narrow explicitly chargeable carve-out.
- The amortisation period under IFRS 15.99 follows the goods or services the asset relates to, which can include anticipated renewals. Whether it does turns on whether a commensurate commission is paid on renewal, not on whether renewals are expected.
- The costs to fulfil gate is subordinate. IFRS 15.96 routes the cost to IAS 2, IAS 16 or IAS 38 first, and the three criteria in IFRS 15.95 are cumulative. The June 2019 and March 2020 IFRS Interpretations Committee agenda decisions both narrowed practice on this point.
- The impairment sequence is IFRS 15.103, then IFRS 15.101, then IFRS 15.104 into the cash-generating unit under IAS 36, and IFRS 15.102 measures the recoverable consideration with the variable consideration constraint switched off and credit risk factored in.
About the Author
Usman is an ACCA-qualified member and an audit and financial reporting professional with a decade of Big 4 experience across Deloitte UK, PwC and BDO, currently an Assistant Manager in Deloitte UK's AI-enabled audit practice. He leads statutory and group audit engagements for multinational clients, with a portfolio in the £20m to £30m fee range and teams of 15 to 25 people across multiple jurisdictions. His technical work concentrates on the judgemental end of the accounting and audit standards. Sector exposure spans banking and financial services, automotive, technology, media and telecom, pharmaceuticals and healthcare, and private equity. Alongside audit delivery he advises CFOs and audit committees on adoption and disclosure decisions, and supports audit partners in forming audit opinions. He has coached more than 150 audit professionals to date, and delivers technical training on accounting and audit standards as well as on new AI tools. He also serves as an AI accelerator at Deloitte, testing new audit technology on live engagements, and built the AI platform behind this site. He writes here on the technical judgements that do not have a straightforward answer in the standards, adding an expert view formed in Big 4 practice.
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