Contract acquisition and fulfillment costs follow separate tests. An incremental acquisition cost is a cost the entity would not have incurred if it had failed to obtain the contract. A recoverable success-based commission can qualify. Salary, bid effort, and travel incurred regardless of success are usually expensed. Explicit customer charges require separate evaluation. The acquisition-cost guidance also permits an election to expense an otherwise qualifying cost when its amortization period would be one year or less. See ASC 340-40-25-1 through 25-4.
Test fulfillment costs under another applicable Topic before Subtopic 340-40. For example, inventory, internal-use software, property and equipment, or software held for sale can control the accounting. A remaining fulfillment cost qualifies only when all three conditions hold:
- It relates directly to an identified contract or specific anticipated contract.
- It generates or enhances a resource used for future performance.
- The entity expects to recover it.
ASC 340-40-25-5 through 25-8 provides examples and expenses general administration, abnormal waste, past performance, and costs that cannot be separated between past and future work.
Amortize a recognized asset systematically with transfer of the related goods or services. The related period can include a supported anticipated renewal. Update amortization for a significant timing change as a change in estimate. For impairment, compare carrying amount with expected consideration for the related goods or services, less the direct costs still to be expensed. Apply the required other-asset impairment sequence first. A recognized Subtopic 340-40 impairment loss cannot be reversed. See ASC 340-40-35-1 through 35-6.
The asset does not change transaction price or revenue allocation. Its disclosures cover classification judgments, amortization methods, closing balances by main category, amortization, impairment, and any elected expedient. Study the Cedar Trail cost schedule, then complete the independent Harbor practice.
Put the concept to work
Understand this concept
- Distinguish qualifying incremental acquisition costs, eligible fulfillment costs outside another Topic, and costs expensed as incurred, including the acquisition-cost practical expedient.
Apply this concept
- Prepare a contract-cost capitalization, amortization, renewal-period, recovery, and impairment schedule tied to the related transfer pattern.
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- Asset — Understand
To understand this concept: Required. Capitalization requires a present economic resource, not merely a contract association.
- Contract cost asset — Understand
To apply this concept: Required. Measurement follows the cost classification and related benefit period.
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- Contract cost asset — Apply
Required level here: understand. Required. Measurement follows the cost classification and related benefit period.