A consulting firm's business-development team spends time and travel budget preparing and presenting a proposal to a prospective client. The firm does not win every proposal it pursues, and nothing in its arrangements allows it to bill a prospective client for this effort regardless of whether the client signs. Under ASC 340-40-25-2, how should the firm account for these proposal costs?
- Capitalize them as an asset immediately and begin amortizing over the anticipated contract term as soon as the proposal is submitted
- Defer them until it is known whether the proposal succeeds, then capitalize them retroactively only if the client signs
- Allocate them between the performance obligations expected under a hypothetical future contract and recognize a matching expense over time
- Recognize them as an expense when incurred, because they would have been incurred regardless of whether the contract was obtained and are not explicitly chargeable to the client either way
Why D? And why not the others?
Correct answer: D. Recognize them as an expense when incurred, because they would have been incurred regardless of whether the contract was obtained and are not explicitly chargeable to the client either way
ASC 340-40-25-2 requires that costs to obtain a contract that would have been incurred regardless of whether the contract was obtained be expensed as incurred, unless those costs are explicitly chargeable to the customer irrespective of outcome; because the firm pursues proposals it does not always win and cannot bill for this effort either way, the cost fails the incremental-cost test in 25-1 and must be expensed immediately. Capitalizing the cost as soon as the proposal is submitted wrongly treats a cost that is not contingent on winning the contract as if it were incremental. Waiting to see whether the proposal succeeds before retroactively capitalizing is not how the standard works, since capitalization is not a wait-and-see election, and a cost that was never incremental in the first place does not become capitalizable just because the client eventually signs. Allocating the cost across future performance obligations confuses cost recognition with the separate transaction-price allocation process used for revenue, which does not apply to a cost that fails the incremental-cost test at all.
Source: FASB Accounting Standards Codification: ASC 340-40-25-2, Other Assets and Deferred Costs — Contracts with Customers