IFRS 15 agenda decision on cost recognition

In June 2019 the IFRS IC published an agenda decision reiterating the principles of IFRS 15 on the distinction between the costs incurred by an entity which relate directly to the transfer of a good or service to the customer, and the costs which are necessary to fulfil the contract but which do not in themselves transfer a good or service to the customer.

Keywords: Mazars, Thailand, IFRS, IFRS IC, IFRS 15

27 August 2019

This distinction determines whether costs to fulfil must be expensed immediately, or whether they should be recognised as an asset (subject to all the criteria in paragraph 95).

In the case in question, the request was made to the IFRS IC in relation to a contract for the construction of a building sold to a customer. The Committee identified a single performance obligation and concluded that the entity transfers control of the building over time. Revenue is therefore recognised over time, using an output method. The worked example presented in the referral to the IFRS IC shows that the profit margin on the building’s foundations is significantly lower than the margin on the building itself. In practice, the components of the construction (foundations, walls, windows and door, roof) have very different margins.

The request asked whether costs incurred in the construction of the foundations should be expensed immediately, or whether they could or should be capitalised.

The committee considered that these costs related to a partially satisfied performance obligation in the contract (that is, they are costs relating to a past performance) under paragraph 98(c) of the standard, since the costs incurred contribute to the construction of the building, control of which is transferred to the customer over time. In other words, these costs do not generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) its performance obligation in the future; It is therefore not possible to recognise an asset. Hence, the Committee decided that the difference in margin on the various construction components should not be taken into account when deciding how to account for the costs to fulfil that have been incurred.

Note also that, in this context, the Committee thought it necessary to examine the relevance of the method used to measure progress. IFRS 15 paragraph B15 requires an entity deciding whether to apply an output method to the measurement of progress to consider whether the output selected would faithfully depict the entity’s performance towards complete satisfaction of the performance obligation. In this instance, the method seems debatable, as a cost-based method of measuring progress would probably better reflect the reality of performance to date.