Contract costs: costs to obtain and fulfil a contract under IFRS 15

Revenue is only half of the IFRS 15 story. The standard also decides when the costs of winning and setting up a contract go on the balance sheet. For subscription businesses with large sales commissions, this can shift a lot of expense into later years.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

IFRS 15 requires a company to capitalise the incremental costs of obtaining a contract, such as sales commissions, if it expects to recover them, and costs to fulfil a contract that relate directly to it, create resources used to satisfy it and are expected to be recovered, unless another standard covers them. The asset is amortised as the related goods or services are transferred. Costs to obtain a contract may be expensed if the amortisation period would be one year or less.

At a glance

Costs to obtain
Capitalise if incremental and recoverable
Typical example
Sales commissions
Practical expedient
Expense if period is a year or less
Costs to fulfil
Capitalise if three criteria are met
Amortisation
As goods or services transfer
Bid costs
Expensed if incurred anyway
Contract costs: costs to obtain and fulfil a contract under IFRS 15Costs to obtain: Capitalise if incremental and recoverable; Typical example: Sales commissions; Practical expedient: Expense if period is a year or less; Costs to fulfil: Capitalise if three criteria are met; Amortisation: As goods or services transfer; Bid costs: Expensed if incurred anyway.KEY FACTS AT A GLANCEContract costs: costs to obtain and fulfil acontract under IFRS 15Costs to obtainCapitalise if incrementaland recoverableTypical exampleSales commissionsPractical expedientExpense if period is ayear or lessCosts to fulfilCapitalise if threecriteria are metAmortisationAs goods or servicestransferBid costsExpensed if incurredanywayChecked against official sourcesTax BakersContract costs: costs to obtain and fulfil a contract under IFRS 15Costs to obtain: Capitalise if incremental and recoverable; Typical example: Sales commissions; Practical expedient: Expense if period is a year or less; Costs to fulfil: Capitalise if three criteria are met; Amortisation: As goods or services transfer; Bid costs: Expensed if incurred anyway.KEY FACTS AT A GLANCEContract costs: costs to obtainand fulfil a contract under IFRS15Costs to obtainCapitalise if incremental and recoverableTypical exampleSales commissionsPractical expedientExpense if period is a year or lessCosts to fulfilCapitalise if three criteria are metAmortisationAs goods or services transferBid costsExpensed if incurred anywayChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

Which costs of obtaining a contract are capitalised?

Only incremental costs: those the company would not have incurred if it had not obtained the contract. A commission paid only when a contract is signed is incremental. Salaries of the sales team, travel to meet the customer and legal fees for drafting a proposal are not, because they are incurred whether or not the contract is won. Those are expensed unless the customer explicitly reimburses them.

As a practical expedient, a company may expense incremental costs immediately if the asset would otherwise be amortised over one year or less.

A worked example: a sales commission

A software company pays a salesperson a commission of CU 12,000 for signing a 3-year subscription contract. The commission is incremental and recoverable from the contract's margin, so it is capitalised and amortised over the 3 years of service.

Capitalising and amortising a commissionCapitalising and amortising a commissionContract signed: commission paidDebitCreditDr Contract cost asset12,000.00Cr Cash12,000.00End of each year: amortisationDebitCreditDr Selling expense4,000.00Cr Contract cost asset4,000.00
A CU 12,000 commission on a 3-year contract is spread over the contract term.

If the customer is expected to renew and the company pays no further commission on renewal, the amortisation period may extend to include the expected renewals, because the asset relates to those goods or services too.

Which costs of fulfilling a contract are capitalised?

If another standard applies, such as IAS 2 for inventory, IAS 16 for equipment or IAS 38 for intangibles, that standard decides. Otherwise, costs to fulfil a contract are capitalised only if all three conditions are met:

  1. They relate directly to a contract or a specific anticipated contract, such as direct labour, direct materials and allocations of costs that relate directly to it.
  2. They generate or enhance resources that will be used to satisfy performance obligations in the future.
  3. They are expected to be recovered.

Set-up costs, such as migrating a customer's data onto an outsourcing platform before the service starts, often qualify. General and administrative costs, costs of wasted materials or labour, and costs that relate to obligations already satisfied are always expensed.

How is the asset amortised and tested?

On a systematic basis consistent with the transfer of the related goods or services, often straight line over the contract and any expected renewals. The asset is impaired if its carrying amount exceeds the remaining consideration the company expects to receive, less the costs still to be incurred to provide the related goods or services.

What is capitalised and what is expensed?

CostTreatment
Commission paid only if the contract is signedCapitalised (or expensed under the one-year expedient)
Sales staff salaries and bonuses based on overall targetsExpensed, as they are not tied to one contract
Legal fees for a bid, whether or not it is wonExpensed
Set-up and data migration before an outsourcing service beginsCapitalised if the three conditions are met
Costs of wasted materials on a projectExpensed

Is it the same under US GAAP?

Largely. ASC 340-40 contains the same requirements and the same one-year practical expedient. See IFRS vs US GAAP: the key differences.

Where to go next

See how revenue is recognised as the related service is provided in over time or at a point in time, and practise the entries in debits and credits for each standard.

Need help applying the standards?

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Questions people ask

Are sales commissions capitalised under IFRS 15?

Yes, if they are incremental to obtaining the contract and expected to be recovered, unless the amortisation period would be one year or less and the company uses the practical expedient.

What costs to fulfil a contract can be capitalised?

Costs that relate directly to the contract, generate or enhance resources used to satisfy it, and are expected to be recovered, if no other standard applies.

Over what period is a contract cost asset amortised?

Consistently with the transfer of the related goods or services, which can include expected renewals.

Are bid costs capitalised?

Not if they are incurred whether or not the contract is obtained; those are expensed.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 15Revenue over time or at a point in time under IFRS 15IFRS 15IFRS 15 revenue from contracts with customers explainedAccounting standardsDebits and credits for standards students: the entries behind each standard

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This guide is general information. It is not tax or legal advice for your situation.