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AASB 15: Cost accounting tips related to your revenue contract

AASB 15: Cost accounting tips

AASB 15 Revenue from Contracts with Customers is here for 31 December 2018 year-ends onward. But have you fully considered all the implementation issues? Your application of the standard, should consider a range of different issues around revenue recognition and measurement, capitalisation of costs, disclosures, transition and flow on impacts to other standards. This article provides observations on cost capitalisation under the new standard. Accounting for revenue under the new standard can be complex and the accounting for costs related to these revenue contracts can be just as difficult.

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Capitalisation cost infographic

What costs can be capitalised?

The new revenue standard requires costs to be capitalised when costs are incremental to obtaining a contract [1] (e.g. sales commissions); and/or incurred to fulfil a contract [2].  If costs do not fall into one of these buckets, then they will be expensed when incurred. Costs can no longer be deferred to normalise profit margins.

Incremental costs of obtaining a contract

Have you been capitalising or expensing all bid costs? Have you been expensing incremental costs of winning a contract (e.g. sales commissions)? If yes, then your company will be impacted!

Under previous standards, constructors capitalised bid costs when it was probable they would win the contract.  These costs generally are not incremental to winning a contract and unless they can be capitalised as fulfilment costs (e.g. engineer’s cost for designing the project), they must now be expensed as incurred. Therefore constructors, expect to see less capitalised costs.  While other industries, like telecommunications and IT previously expensed sales commissions, and must now capitalise them.

Fulfilment costs

More judgment is required when it comes to fulfilment costs.  Costs currently capitalised as inventories will likely continue to be capitalised. The treatment of costs capitalised as work-in-progress (WIP) under previous standards will depend on how revenue is recognised under the new revenue standard. Where revenue is recognised:

  • at a point-in-time, costs will be capitalised (probably as inventory) until control transfers
  • over-time, costs will generally be expensed as incurred as control of WIP transfers continuously.

Amortisation of capitalised costs

Is it as simple as amortising straight-line over the contract period?  Capitalised cost are amortised to P&L on satisfaction of performance obligations (PO). Where there is one PO, the amortisation method is usually the same as the revenue recognition method (e.g. time based or costs to complete).

When there are multiple POs, possibilities include:

  • allocate costs to each PO and amortise on the same basis as the revenue is recognised
  • determine a single amortisation method across the whole contract. This can be complex. Straight-line over the contract period is easy but what about if the POs are satisfied over different times (three vs 18 months)? Or when most of the revenue is recognised near contract completion? In these instances time based over the contract period is unlikely to be appropriate and other methods like cost to complete may be more appropriate.

Further, the period of amortisation may not be the contract period. If the contract is expected to be renewed, the recognition period could also include the anticipated renewal period assuming that further costs of winning the renewal contract are not incurred.

Presentation

It is not clear where in the P&L the amortisation of the capitalised costs should be presented. Is costs of sales, selling expense or amortisation expense the appropriate line item?

We believe including these costs in operating expense (within EBITDA), rather than amortisation expense (excluded from EBITDA) is a better reflection of the nature of these expenses and is generally consistent with how these costs were presented to the market previously.

Next steps

This new standard is not only about revenue recognition. Use these observations to re-analyse your assessment of costs.

If you would like to discuss the implementation of the new standard on your organisation contact your KPMG adviser or the contacts on this page.

1  Entities may expense incremental costs of obtaining a contract, if the contract cost asset would be amortised over a period of one year or less.

2  Costs meet fulfilment criteria for capitalisation when 1) not in scope of another standard (e.g. inventories), 2) relate directly to a contract or anticipated contract, 3) enhances ability to satisfy performance obligations in the future, and 4) is expected to be recovered.

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