Under the Financial Reporting Standards (FRS), particularly FRS 15/ASC 606, contract acquisition costs can be capitalised, rather than expensed immediately, if conditions are met.
Capitalisation of Contract Acquisition Costs
1. Incremental Costs of Obtaining a Contract
Incremental costs incurred to obtain a contract with a customer can be capitalised if they are expected to be recovered. Incremental costs are costs that would not have been incurred if the contract had not been obtained, such as sales commissions.
- Example: Sales commissions paid to sales personnel specifically for securing a contract.
2. Criteria for Capitalisation
To capitalise the costs of obtaining a contract, the following criteria must be met:
- The costs are incremental, meaning they would not have been incurred if the contract had not been obtained.
- The costs are expected to be recovered through the revenue generated by the contract.
3. Amortisation of Capitalised Costs
Capitalised contract acquisition costs should be amortised on a systematic basis that is consistent with the transfer of the related goods or services to the customer. This typically means the costs are amortised over the period during which the related revenue is recognised.
4. Practical Expedient
As a practical expedient, companies may choose to expense the contract acquisition costs immediately if the amortisation period for those costs would be one year or less. This simplifies the accounting process for shorter-term contracts.
Example Scenario
- Company A incurs a $10,000 commission for obtaining a three-year contract.
- Capitalisation: The $10,000 commission is capitalised as a contract acquisition cost.
- Amortisation: The capitalised cost is amortised over the three years, consistent with the revenue recognition from the contract.
Presentation and Disclosure
- Balance Sheet: Capitalised contract acquisition costs are presented as an asset.
- Income Statement: Amortisation of these costs is recognised as an expense over the contract period.
- Disclosure: Companies must disclose the accounting policy for contract acquisition costs, the amount of amortisation recognised, and any significant judgments made in determining the amount to be capitalised and the amortisation method.
Conclusion
Contract acquisition costs under FRS/ASC 606 can be capitalised if they are incremental and expected to be recovered. These costs are then amortised throughout the contract, aligning with the transfer of goods or services to the customer. Immediate expensing is allowed if the contract period is one year or less, providing a practical expedient for simpler accounting.
If you have any questions or need further assistance with company compliance in Singapore, please do not hesitate to contact our team. You can reach the Raffles Corporate Services team via email at [email protected].
Yours sincerely,
The editorial team at Raffles Corporate Services
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