What are capitalised contract costs (ASC 340-40)?
Capitalised contract costs are costs of obtaining or fulfilling a customer contract that are recorded as an asset and expensed over the period the contract delivers, instead of when paid. Under ASC 340-40 and IFRS 15 the main example is sales commissions: incremental costs of winning a contract are capitalised if the company expects to recover them.
Also calledASC 340-40capitalised commissionscosts to obtain a contractdeferred commissions
Compare the softwareBest revenue recognition software →All 14 financial close vendors →
- Main example
- Sales commissions
- Standards
- ASC 340-40 / IFRS 15
- Expedient
- Expense if period ≤ 1 year
How capitalised contract costs work
Costs to obtain a contract qualify only if they are incremental, meaning they would not have been incurred without winning that contract; a commission paid on signature qualifies, a salesperson's base salary does not. Costs to fulfil a contract are capitalised if they relate directly to the contract, create resources used to deliver it and are expected to be recovered, and are not covered by another standard. The asset is amortised on a systematic basis that matches the transfer of the goods or services, which can extend beyond the initial contract when renewals are expected. A practical expedient lets companies expense costs of obtaining a contract immediately when the amortisation period would be one year or less. Commission plans with tiers, clawbacks and renewal rates make tracking complex. RightRev and Trullion calculate commission capitalisation and amortisation alongside revenue.
Common questions
Do all sales commissions have to be capitalised?+
Only incremental ones expected to be recovered. Companies can expense them immediately if the amortisation period would be one year or less.
Over what period are capitalised commissions amortised?+
Over the period the related goods or services are transferred, which can include expected renewals when the commission is not matched by a similar commission on renewal.
What is the difference between costs to obtain and costs to fulfil a contract?+
Costs to obtain are incremental costs of winning the contract, such as commissions. Costs to fulfil are costs of delivering it, such as set-up work, capitalised only if they meet specific conditions.
Software that capitalises contract costs
Part of Accountio’s accounting technology coverage · Glossary
