A company pays its sales staff a commission only when they successfully close a new customer contract; the commission would not have been incurred if the contract had not been obtained. The related contracts are expected to be fulfilled over eighteen months. Under IFRS 15 paragraphs 91-94, how should the company account for this commission?
- Recognize the commission as an asset, the incremental cost of obtaining the contract, and amortize it on a systematic basis consistent with the transfer of the goods or services to which it relates, because the amortization period exceeds the twelve-month practical expedient threshold in paragraph 94
- Expense the commission immediately when paid, because paragraph 94's practical expedient allows immediate expensing whenever a cost is directly linked to a single identifiable contract, regardless of that contract's duration
- Recognize the commission as an asset and amortize it over the sales staff's average employment tenure with the company, because the cost relates to their compensation rather than to any specific customer contract
- Expense the commission immediately when paid, because sales commissions are selling costs by nature and IFRS 15 excludes all costs incurred in obtaining a contract from capitalization regardless of the contract's expected duration
Why A? And why not the others?
Correct answer: A. Recognize the commission as an asset, the incremental cost of obtaining the contract, and amortize it on a systematic basis consistent with the transfer of the goods or services to which it relates, because the amortization period exceeds the twelve-month practical expedient threshold in paragraph 94
IFRS 15 paragraphs 91-94 require an entity to capitalize the incremental costs of obtaining a contract, costs it would not have incurred if the contract had not been obtained, such as a success-based sales commission, and amortize them on a systematic basis consistent with the transfer of the related goods or services, unless paragraph 94's practical expedient applies, which permits immediate expensing only when the resulting asset's amortization period would be twelve months or less; here the contracts are fulfilled over eighteen months, so the expedient is unavailable and capitalization is required. The option applying the practical expedient regardless of contract duration is wrong because paragraph 94 conditions the expedient specifically on a one-year-or-less amortization period, not merely on the cost being linked to an identifiable contract. The option amortizing over the sales staff's employment tenure is wrong because the capitalized asset must be amortized consistently with the transfer of the goods or services under the specific contract that gave rise to the cost, not over an unrelated period tied to the employee's tenure. The option excluding all contract-obtaining costs from capitalization is wrong because paragraphs 91-94 specifically require capitalization of incremental costs of obtaining a contract as the general rule, with immediate expensing being the narrow exception.
Source: IFRS 15 Revenue from Contracts with Customers, paragraphs 91-94 (costs to obtain a contract)