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

IFRS 15 capitalized contract costs amortization impairment loss accounting principles contract costs good and services transfer

IFRS 15 requires that capitalized contract cost assets are amortized and tested for impairment. Which one of the following statements is correct? 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. 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. 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 according to IFRS 15 on the amortization and testing for impairment of capitalized contract cost assets 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."

This aligns with IFRS 15, which stipulates that capitalized contract cost assets, once recognized, should be amortized over their useful life, with the amortization expense reflecting the pattern of the entity transferring goods or services to the customer. This could involve a straight-line basis or another systematic basis that matches the pattern of economic benefit consumption. Additionally, IFRS 15 also requires that contract cost assets be tested for impairment, and 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 recognized as expenses, an impairment loss would exist and an impairment loss should be recognized in accordance with IAS 36 Impairment of Assets.

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