Syllabus C. Reporting The Financial Performance Of A Range Of Entities C1. Revenue

C1c. Apply The Criteria For Recognition Of Contract Costs As An Asset 5 / 7

Syllabus C1c)

Apply the criteria for recognition of contract costs as an asset.

Incremental Costs Of Obtaining A Contract

These are recognised as an asset (if they are expected to be recovered from the customer)

  • Incremental means these costs ONLY occurred due to the contract eg Sales commission

  • If amortisation of these costs would be


  1. Due diligence on a potential customer = Expense 

    (Incurred whether even if we don't take on the customer)

  2. Commissions to sales employees = Asset and amortised

    (Incurred only for the customer contract & recovery expected through future sales)

Costs To Fulfil A Contract

First, be careful these aren't just normal costs dealt under their own standard (eg IAS 2 Inventories, IAS 16 PPE & IAS 38 Intangibles) 

Otherwise we again recognise these as an asset if they:

  1. Relate directly to the contract

  2. Generate resources we are going to use when we sell

  3. Are expected to be recovered

Examples to show as assets include:

Direct labour and Materials
Allocations of depreciation or insurance
Anything explicitly chargeable to the customer 
Subcontractor costs

Examples to expense include:

General and administrative costs (not explicitly chargeable to the customer) 
Wasted materials, labour and other resources 

Costs relating to satisfied or partially satisfied performance obligations (past performance) must be expensed also