How are incremental costs to obtain a contract treated under IFRS 15?

Under IFRS 15 Contract Costs, incremental costs incurred to obtain a customer contract must be capitalised as an asset if the entity expects to recover them, rather than expensed immediately. - Recognition — what qualifies (IFRS 15.91): An entity shall recognise an asset for incremental costs of obtaining a contract only if those costs are expected to be recovered. "Incremental" means costs that would not have been incurred had the contract not been obtained — the classic example is a sales commission payable only upon contract signature. Bid costs, proposal preparation costs, and pre-contract legal fees that are incurred regardless of outcome do not qualify and are expensed as incurred (IFRS 15.93). - Practical expedient (IFRS 15.94): If the amortisation period of the asset would be one year or less, the entity is permitted — but not required — to expense the incremental costs immediately. This is an accounting policy election applied consistently to a portfolio of contracts with similar characteristics. - Measurement at initial recognition (IFRS 15.91): The asset is measured at cost — the direct incremental amount paid (e.g., commission amount). No mark-up or profit element is included. - Amortisation (IFRS 15.99): The capitalised contract cost asset is amortised on a systematic basis consistent with the pattern of transfer of goods or services to which the asset relates. This may mirror the revenue recognition pattern but could also extend beyond a single contract's term if the asset relates to anticipated renewals (IFRS 15.99). The amortisation period must reflect the expected period over which the entity will benefit from the enhanced relationship.

How does the amortisation period for capitalised contract costs change when a contract includes variable renewal options with uncertain pricing?

- Impairment (IFRS 15.101–102): At each reporting date, the entity must assess whether the carrying amount of the asset exceeds the remaining consideration expected to be received, less directly attributable costs yet to be incurred. Any excess is recognised as an impairment loss. A reversal is required if impairment conditions subsequently reverse (IFRS 15.102). - Presentation and disclosure (IFRS 15.128): Entities must disclose the closing balances of capitalised contract costs by asset category (costs to obtain vs. costs to fulfil), the amortisation method, and any impairment losses recognised in the period. These assets are typically shown within non-current or current assets depending on their expected amortisation profile. A SaaS company signs a three-year software subscription contract worth €300,000. The salesperson earns a commission of €15,000, payable only upon contract execution — a classic incremental cost to obtain. | Account | Dr (€) | Cr (€) | |---|---|---| | Contract Cost Asset (Costs to Obtain) | 15,000 | | | Accrued Commissions Payable | | 15,000 | The entity amortises the asset straight-line over 36 months (€417/month), consistent with the revenue recognition pattern for an evenly delivered subscription service (IFRS 15.99).

Where should contract cost assets be classified on the balance sheet, and how does IAS 1 interact with the IFRS 15 presentation requirements?

Monthly amortisation entry (each month for 36 months): | Account | Dr (€) | Cr (€) | |---|---|---| | Amortisation of Contract Costs (P&L) | 417 | | | Contract Cost Asset | | 417 | If the entity expects that customers typically renew for an additional two-year term without incremental selling effort, the amortisation period should be extended to five years (60 months = €250/month), reflecting the full period over which the commission provides economic benefit (IFRS 15.99). - Conflating incremental with directly attributable: Many preparers capitalise pre-bid legal or tender preparation costs alongside sales commissions, arguing they are "contract-related." These fail the IFRS 15.91 test — only costs that would not have been incurred but for winning the contract qualify. Bid costs are expensed regardless of outcome. - Ignoring the renewal period in the amortisation base: Applying an amortisation period equal to the initial contract term when the commission actually covers anticipated renewals understates the asset's useful life, inflating amortisation charges and distorting margins. IFRS 15.99 explicitly requires the period to reflect the anticipated benefit period, including expected renewals.

If a sales commission is partially incremental (e.g., a higher rate paid only on new contracts vs. a base rate paid on all sales), how should the entity split and account for each component under IFRS 15.91?

- Misapplying the practical expedient: Entities often apply the one-year expedient (IFRS 15.94) inconsistently — capitalising some short-duration commissions and expensing others with no documented policy rationale. Auditors will challenge inconsistent application, and the election must be applied systematically across a similar portfolio. - IFRS 15.91 — Core recognition criterion: capitalise incremental costs expected to be recovered. - IFRS 15.93 — Costs to obtain a contract that are not incremental are expensed as incurred. - IFRS 15.94 — Practical expedient: immediate expensing when amortisation period ≤ one year. - IFRS 15.99 — Amortisation basis, including extension for expected contract renewals. - IFRS 15.101–102 — Impairment assessment and reversal requirements for contract cost assets. - IFRS 15.128 — Disclosure requirements: asset categories, amortisation method, impairment losses.

IFRS 15 Contract Costs

IFRS 15 Contract Costs — Core Rule

Under IFRS 15 Contract Costs, incremental costs incurred to obtain a customer contract must be capitalised as an asset if the entity expects to recover them, rather than expensed immediately.

How IFRS 15 Contract Costs Works

Recognition — what qualifies (IFRS 15.91): An entity shall recognise an asset for incremental costs of obtaining a contract only if those costs are expected to be recovered. "Incremental" means costs that would not have been incurred had the contract not been obtained — the classic example is a sales commission payable only upon contract signature. Bid costs, proposal preparation costs, and pre-contract legal fees that are incurred regardless of outcome do not qualify and are expensed as incurred (IFRS 15.93).

Practical expedient (IFRS 15.94): If the amortisation period of the asset would be one year or less, the entity is permitted — but not required — to expense the incremental costs immediately. This is an accounting policy election applied consistently to a portfolio of contracts with similar characteristics.

Measurement at initial recognition (IFRS 15.91): The asset is measured at cost — the direct incremental amount paid (e.g., commission amount). No mark-up or profit element is included.

Amortisation (IFRS 15.99): The capitalised contract cost asset is amortised on a systematic basis consistent with the pattern of transfer of goods or services to which the asset relates. This may mirror the revenue recognition pattern but could also extend beyond a single contract's term if the asset relates to anticipated renewals (IFRS 15.99). The amortisation period must reflect the expected period over which the entity will benefit from the enhanced relationship.

Impairment (IFRS 15.101–102): At each reporting date, the entity must assess whether the carrying amount of the asset exceeds the remaining consideration expected to be received, less directly attributable costs yet to be incurred. Any excess is recognised as an impairment loss. A reversal is required if impairment conditions subsequently reverse (IFRS 15.102).

Presentation and disclosure (IFRS 15.128): Entities must disclose the closing balances of capitalised contract costs by asset category (costs to obtain vs. costs to fulfil), the amortisation method, and any impairment losses recognised in the period. These assets are typically shown within non-current or current assets depending on their expected amortisation profile.

IFRS 15 Contract Costs — Practical Example

A SaaS company signs a three-year software subscription contract worth €300,000. The salesperson earns a commission of €15,000, payable only upon contract execution — a classic incremental cost to obtain.

At contract inception — capitalise the commission

Account	Dr (€)	Cr (€)
Contract Cost Asset (Costs to Obtain)	15,000
Accrued Commissions Payable		15,000

The entity amortises the asset straight-line over 36 months (€417/month), consistent with the revenue recognition pattern for an evenly delivered subscription service (IFRS 15.99).

Monthly amortisation entry (each month for 36 months)

Account	Dr (€)	Cr (€)
Amortisation of Contract Costs (P&L)	417
Contract Cost Asset		417

If the entity expects that customers typically renew for an additional two-year term without incremental selling effort, the amortisation period should be extended to five years (60 months = €250/month), reflecting the full period over which the commission provides economic benefit (IFRS 15.99).

IFRS 15 Contract Costs — Common Pitfalls

Conflating incremental with directly attributable: Many preparers capitalise pre-bid legal or tender preparation costs alongside sales commissions, arguing they are "contract-related." These fail the IFRS 15.91 test — only costs that would not have been incurred but for winning the contract qualify. Bid costs are expensed regardless of outcome.

Ignoring the renewal period in the amortisation base: Applying an amortisation period equal to the initial contract term when the commission actually covers anticipated renewals understates the asset's useful life, inflating amortisation charges and distorting margins. IFRS 15.99 explicitly requires the period to reflect the anticipated benefit period, including expected renewals.

Misapplying the practical expedient: Entities often apply the one-year expedient (IFRS 15.94) inconsistently — capitalising some short-duration commissions and expensing others with no documented policy rationale. Auditors will challenge inconsistent application, and the election must be applied systematically across a similar portfolio.

IFRS 15 Contract Costs — Key Paragraphs

IFRS 15.91 — Core recognition criterion: capitalise incremental costs expected to be recovered.
IFRS 15.93 — Costs to obtain a contract that are not incremental are expensed as incurred.
IFRS 15.94 — Practical expedient: immediate expensing when amortisation period ≤ one year.
IFRS 15.99 — Amortisation basis, including extension for expected contract renewals.
IFRS 15.101–102 — Impairment assessment and reversal requirements for contract cost assets.
IFRS 15.128 — Disclosure requirements: asset categories, amortisation method, impairment losses.