Understanding IFRS 15: Amortization & Impairment Testing of Capitalized Contract Costs

IFRS 15 capitalized contract costs amortization profit or loss impairment testing IFRS customer contracts

IFRS 15 requires that capitalized contract cost assets are amortized and tested for impairment. Which one of the following statements is correct? After initial capitalization contract costs must be amortized with the amortization expense recognized in profit or loss on a systematic basis consistent with the pattern of the entity’s transfer of the related goods or services to the customer. After recognizing an impairment loss on capitalized contract costs incurred to obtain or fulfill a contract with a customer, impairment losses recognized in accordance with other standards such as IAS 36 Impairment of Assets must be considered Capitalized contract costs must be amortized to profit or loss on a straight-line basis unless another systematic basis reflects the expected pattern of consumption of the future economic benefits embodied in the capitalized contract cost asset. An impairment of the contract cost asset exists if the carrying amount of the contract cost asset exceeds the remaining consideration the entity expects to receive less costs for the related goods or services that have been recognized as expenses.

The correct statement is: After initial capitalization, contract costs must be amortized with the amortization expense recognized in profit or loss on a systematic basis consistent with the pattern of the entity’s transfer of the related goods or services to the customer.

According to IFRS 15, capitalized contract costs should be amortized over the period of benefit to the customer, with the amortization expense being recognized in profit or loss in a manner that corresponds with the pattern of the entity's transfer of goods or services to the customer. This means that the amortization method should reflect the pattern of revenue recognition, which could be, for example, on a straight-line basis or based on the progress of the contract, depending on what best reflects the consumption of the future economic benefits embodied in the capitalized contract cost asset.

Additionally, an impairment of the contract cost asset exists if its carrying amount exceeds the expected remaining consideration the entity anticipates receiving, less any costs for related goods or services already recognized as expenses. It is also important to consider impairment losses in accordance with other standards, such as IAS 36 Impairment of Assets, when capitalized contract costs have been impaired.

In summary, the correct approach to contract cost amortization and impairment testing is critical to ensure that the financial statements accurately represent the performance of the contract and the related costs and revenues.

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