requirements to costs incurred that relate to a contract with a customer that is within
the scope of IFRS 15 (see 3 above). [IFRS 15.8].
When an entity recognises capitalised contract costs under IFRS 15, any such assets
must be presented separately from contract assets and contract liabilities (see 11.1 below)
in the statement of financial position or disclosed separately in the notes to the financial
statements (assuming they are material). Furthermore, entities must consider the
requirements in IAS 1 on classification of current assets when determining whether their
contract cost assets are presented as current or non-current. See 11.1 below for a
discussion on classification as current or non-current.
10.3.1
Costs to obtain a contract
Before applying the cost requirements in IFRS 15, entities need to consider the
scoping provisions of the standard. Specifically, an entity needs to first consider
whether the requirements on consideration payable to a customer under IFRS 15
apply to the costs (see 6.7 above for a discussion on accounting for consideration paid
or payable to a customer).
For those costs within the scope of the cost requirements in IFRS 15, the incremental
costs of obtaining a contract with a customer are recognised as an asset if the entity
expects to recover them. [IFRS 15.91-93]. An entity can expect to recover contract
acquisition costs through direct recovery (i.e. reimbursement under the contract) or
indirect recovery (i.e. through the margin inherent in the contract). Incremental costs
are those that an entity would not have incurred if the contract had not been obtained.
[IFRS 15.92].
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Costs incurred to obtain a contract that are not incremental costs are required to be
expensed as incurred, unless they are explicitly chargeable to the customer (regardless
of whether the contract is obtained).
The following figure illustrates the requirements in IFRS 15:
Figure 28.19:
Costs to obtain a contract
Would the entity incur the costs
Are those costs explicitly chargeable
No
Yes
only if the contract is obtained
to the customer regardless of
(i.e. are the costs incremental)?
whether the contract is obtained?
Yes
No
Does the entity expect to recover
No
Expense the costs as incurred.
those costs?
Yes
The entity may either expense as
Would the amortisation period of
Yes
incurred or recognise as an asset in
any asset recognised be one year
accordance with the practical
or less?
expedient in paragraph 94 of IFRS 15.
No
Recognise the costs of obtaining a
contract as an asset.
In a FASB TRG agenda paper, the FASB staff suggested that, to determine whether a
cost is incremental, an entity should consider whether it would incur the cost if the
customer (or the entity) decides, just as the parties are about to sign the contract, that it
will not enter into the contract. If the costs would have been incurred even if the
contract is not executed, the costs are not incremental to obtaining that contract. The
FASB staff also noted that the objective of this requirement is not to allocate costs that
are associated in some manner with an entity’s marketing and sales activity, but only to
identify those costs that an entity would not have incurred if the contract had not been
obtained. For example, salaries and benefits of sales employees that are incurred
regardless of whether a contract is obtained are not incremental costs.129
Consider the following example from the FASB TRG agenda paper:
Example 28.84: Fixed employee salaries130
An entity pays an employee an annual salary of £100,000. The employee’s salary is based on the number of prior-
year contracts he or she signed, as well as the projected number of contracts the employee will sign for the current
year. The employee’s current year salary will not change if the number of contracts the employee actually signs differs
from the projected number. However, any difference would affect the employee’s salary in the following year.
The FASB TRG members generally agreed that no portion of the employee’s salary should be capitalised
because it is not an incremental cost of obtaining a contract. The employee’s salary would have been incurred
regardless of the number of contracts the employee has actually signed during the current year.
Revenue
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The standard cites sales commissions as a type of an incremental cost that may require
capitalisation under the standard. For example, commissions that are related to sales from
contracts signed during the period may represent incremental costs that would require
capitalisation. The standard does not explicitly address considerations for different types
of commission programmes. Therefore, entities have to exercise judgement to determine
whether sales commissions are incremental costs and, if so, the point in time when the
costs would be capitalised. However, the FASB TRG members generally agreed that an
employee’s title or level in the organisation or how directly involved the employee is in
obtaining the contract, are not factors in assessing whether a sales commission is
incremental.131 Consider the following example from a FASB TRG paper:
Example 28.85: Commissions paid to different levels of employees132
An entity’s salesperson receives a 10% sales commission on each contract that he or she obtains. In addition,
the following employees of the entity receive sales commissions on each signed contract negotiated by the
salesperson: 5% to the manager and 3% to the regional manager.
The FASB TRG members generally agreed that all of the commissions are incremental because the
commissions would not have been incurred if the contract had not been obtained. IFRS 15 does not distinguish
between commissions paid to the employee(s) based on the function or the title of the employee(s) that
receives a commission. It is the entity that decides which employee(s) are entitled to a commission as a result
of obtaining a contract.
We believe that commissions that are paid to a third party in relation to sales from
contracts that were signed during the period may also represent incremental costs that
would require capitalisation. That is, commissions paid to third parties should be
evaluated in the same manner as commissions paid to employees in order to determine
whether they are required to be capitalised.
See 10.3.1.A and 10.3.1.B below for additional examples provided in the November 2016
FASB TRG agenda paper on how to apply the incremental cost requirements. In
addition, entities need to carefully evaluate all compensation plans, not just sales
commission plans, to determine whether any plans contain incremental costs that need
to be capitalised. For example, payments under a compensation ‘bonus’ plan may be
solely tied to contracts that are obtained. Such costs would be capitalised if they are
incremental costs of obtaining a contract, irrespective of the title of the plan.
Example 28.86: Commission
s paid to a pool of funds
Assume that an entity has a compensation plan for support personnel in its sales department. As a group, the
employees are entitled to a pool of funds calculated based on 2% of all new contracts signed during the
monthly period. Once the amount of the pool is known, the amount paid to each individual employee is
determined based on each employee’s rating.
While the amount paid to each employee is discretionary (based on each employee’s rating), the total amount
of the pool is considered an incremental cost to obtain a contract because the entity owes that amount to the
employees (as a group) simply because a contract was signed.
The TRG members discussed the underlying principle for capitalising costs under the
standard and generally agreed that IFRS 15 did not amend the requirements for liabilities
(e.g. IAS 37). Therefore, entities would first refer to the applicable liability standards to
determine when they are required to accrue for certain costs. Entities would then use
the requirements in IFRS 15 to determine whether the related costs need to be
capitalised. The TRG members acknowledged that certain aspects of the cost
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requirements require entities to apply significant judgement in analysing the facts and
circumstances and determining the appropriate accounting treatment.133
In addition, the IASB staff observed in a TRG agenda paper that incremental costs of
obtaining a contract are not limited to initial incremental costs. Commissions recognised
subsequent to contract inception (e.g. commissions paid on modifications, commissions
subject to contingent events or clawback) because they did not meet the recognition
criteria for liabilities at contract inception would still be considered for capitalisation as
costs to obtain the contract when the liability is recognised. This would include costs
related to contract renewals because, as the TRG agenda paper noted, a renewal is a
contract and there is nothing in the requirements for costs to obtain a contract that
suggests a different treatment for contracts that are renewals of existing contracts. That
is, the only difference between the two costs would be the timing of recognition based
on when a liability has been incurred.134 See 10.3.1.C below for additional discussion of
capitalising commissions paid on contract modifications.
Unlike many commissions, some incentive payments, such as bonuses and other
compensation that are based on quantitative or qualitative metrics that are not related
to contracts obtained (e.g. profitability, earnings per share (EPS), performance
evaluations) are unlikely to meet the criteria for capitalisation because they are not
incremental costs of obtaining a contract. However, a legal contingency cost may be an
incremental cost of obtaining a contract when a lawyer agrees to receive payment only
upon the successful completion of a negotiation. Determining which costs must be
capitalised under the standard may require judgement and it is possible that some
contract acquisition costs are determined to be incremental and others are not.
Consider the following example from a FASB TRG agenda paper:
Example 28.87: Incremental and non-incremental costs for same contract135
An entity pays a 5% sales commission to its employees when they obtain contracts with customers. An
employee begins negotiating a contract with a prospective customer and the entity incurs £5,000 in legal and
travel costs in the process of trying to obtain the contract. The customer ultimately enters into a £500,000
contract and, as a result, the employee receives a sales commission of £25,000.
The FASB TRG members generally agreed that the entity should only capitalise the commission paid to the
employee of £25,000. This cost is the only one that is incremental to obtaining the contract. While the entity
incurs other costs that are necessary to facilitate a sale (e.g. legal, travel), those costs would have been incurred
even if the contract had not been obtained.
The standard provides the following example regarding incremental costs of obtaining
a contract. [IFRS 15.IE189-IE191].
Example 28.88: Incremental costs of obtaining a contract
An entity, a provider of consulting services, wins a competitive bid to provide consulting services to a new
customer. The entity incurred the following costs to obtain the contract:
€
External legal fees for due diligence
15,000
Travel costs to deliver proposal
25,000
Commissions to sales employees
10,000
Total costs incurred
50,000
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In accordance with paragraph 91 of IFRS 15, the entity recognises an asset for the €10,000 incremental costs
of obtaining the contract arising from the commissions to sales employees because the entity expects to
recover those costs through future fees for the consulting services. The entity also pays discretionary annual
bonuses to sales supervisors based on annual sales targets, overall profitability of the entity and individual
performance evaluations. In accordance with paragraph 91 of IFRS 15, the entity does not recognise an asset
for the bonuses paid to sales supervisors because the bonuses are not incremental to obtaining a contract. The
amounts are discretionary and are based on other factors, including the profitability of the entity and the
individuals’ performance. The bonuses are not directly attributable to identifiable contracts.
The entity observes that the external legal fees and travel costs would have been incurred regardless of
whether the contract was obtained. Therefore, in accordance with paragraph 93 of IFRS 15, those costs are
recognised as expenses when incurred, unless they are within the scope of another Standard, in which case,
the relevant provisions of that Standard apply.
As a practical expedient, the standard permits an entity to immediately expense contract
acquisition costs when the asset that would have resulted from capitalising such costs
would have been amortised within one year or less. [IFRS 15.94]. It is important to note
that the amortisation period for incremental costs may not always be the initial contract
term. See 2.3.3.B above for transition considerations and 10.3.3 below for discussion of
the amortisation of capitalised costs.
IFRS 15 represents a significant change in practice for entities that previously expensed
the costs of obtaining a contract and are required to capitalise them under IFRS 15.
Entities need to evaluate all sales commissions paid to employees and capitalise any
costs that are incremental, regardless of how directly involved the employee was in the
sales process or the level or title of the employee.
In addition, this may be a change for entities that previously capitalised costs to obtain
a contract, particularly if the amounts capitalised were not incremental and, therefore,
would not be eligible for capitalisation under IFRS 15, unless they are explicitly
chargeable to the customer regardless of whether the contract is obtained.
10.3.1.A Does
the
timing
of commission payments affect whether they are
incremental costs?
At their November 2016 meeting, FASB TRG members generally agreed that the
timing
of commission payments does not affect whether the costs would have been incurred if
the contract had not been obtained. However, there could be additional factors or
contingencies that would need to be considered in different commission plans that
could affect the determination of whether all (or a portion) of a cost is incremental.136
Consider the following example from a FASB TRG agenda paper:
Example 28.89: Timing of commission payments137
An entity pays an employee a 4% sales commission on a £50,000 signed contract with a customer. For cash
flow management purposes, the entity pays the employee half of the commission (i.e. 2% of the total contract
value) upon completion of the sale and the remainder in six months’ time. The employee is entitled to receive
the unpaid commission even if he or she is no longer employed by the entity when payment is due.
The FASB TRG members generally agreed that the entity should capitalise the entire commission in this
example (the timing of which would coincide with the recognition of the related liability). That is, the entity
would not just capitalise the portion it paid immediately and expense the rest.
In this fact pattern, only the passage of time is required for the entity to pay the second
half of the commission. For example, in some commission plans, the employee will only
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be entitled to the second half of the commission payment if the employee is still
employed by the entity when the commission is due. For plans such as these, an entity
would need to carefully evaluate whether the requirement to remain employed in order
to receive the commission (i.e. the service vesting condition) is substantive. We believe
the second half of the commission payment would not be incremental if the service
condition is substantive because other conditions are necessary, beyond simply
obtaining the contract, for the entity to incur the cost.
If the entity’s payment of a commission is only ‘contingent’ on a customer paying the
amount due in the obtained contract, we do not believe this would influence the
determination of whether the commission is an incremental cost, provided the contract
meets the Step 1 criteria to be accounted for as a contract under the model. However, if
there is an extended payment term (i.e. there is a significant amount of time between
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