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Revenue recognition – Costs of obtaining a contract

Date recorded:

Accounting for costs of obtaining a contract

The Exposure Draft, Revenue from Contracts with Customers proposes that all costs incurred in obtaining a contract be expensed as incurred as the asset resulting from the costs of obtaining a contract is primarily the contract asset.

Some comment letter respondents disagreed with this proposal because they felt:

  • the proposed guidance is inconsistent with other accounting literature and other exposure drafts
  • cost guidance should not be included in a revenue recognition standard
  • some costs of obtaining a contract result in future benefits that represent an asset.

The Boards discussed the topic of costs of obtaining a contract in the context of revenue recognition and frequently compared these issues with how they are being handled in the leasing and insurance projects. The Boards first tentatively agreed that the revenue recognition project should not comprehensively address all cost guidance during redeliberations, but rather only the guidance that would be affected by withdrawing existing revenue recognition guidance.

The discussion then centered on whether to reverse the proposal in the exposure draft to expense all costs as incurred and recognise certain costs as assets. The staff agreed with the comment letter responses that stated in certain instances, costs from obtaining a contract result in the creation of an asset that should be recognised. Additionally, the staff acknowledged that the proposals for recognition of costs are inconsistent with other exposure drafts such as lease accounting, insurance contracts and the FASB's proposals on financial instruments. However, the staff also believes that each project has its own objectives.

The staff provided the Boards with two alternatives for addressing constituent concerns on the treatment of costs of obtaining contracts:

  • Alternative 1 would recognise an asset for the incremental costs (i.e., costs directly attributable to obtaining a contract and would not have been incurred if the contract had not been obtained) that are expected to be recovered.
  • Alternative 2 would recognise all costs of obtaining a contract as expenses except for those guaranteed to be recovered which would be recognised as assets.

Both Boards were generally supportive of Alternative 1, although one Board member from each Board supported Alternative 2. Additionally, several Board members were not enthused with their support for Alternative 1, some preferring direct expense of costs instead.

The discussion around Alternative 1 focused on what would be considered incremental costs of a contract. Specifically mentioned were questions on costs incurred at a "portfolio" level such as salary expense and whether successful execution of contract was required to recognise the associated costs as an asset. The staff clarified the proposal in Alternative 1 would only apply to successful efforts.

The Boards tentatively agreed to require an asset to be recognised for the incremental costs of obtaining a contract that are expected to be recovered. The Boards also requested the staff develop additional guidance and/or examples on what constitutes incremental costs as there were differing interpretations among the Board members based on the language in the proposal.

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