Mobile Cells Inc. pay a 5% commission to members of its sales force when they successfully sign up a new contract. Eva, a senior sales representative, begins negotiating with a prospective customer Gabriel. Eva, in her capacity as a Mobile Cells Inc. sales representative, incurs MU6,000 in travel costs. Gabriel ultimately signs a new contract and as a result Eva receives a commission of MU10,000. The pattern of the entity’s transfer of the related goods or services to Gabriel is over 18 months. Which one of the following statements is correct?
Capitalization of the MU10,000 is an option, not a requirement, if Mobile Cells Inc. expect to recover the commission, being an incremental cost of obtaining the contract with Gabriel, a customer.
While Mobile Cells Inc. incurs travel costs that are necessary to facilitate the sale those costs would have been incurred even if the contract had not been obtained, and therefore, cannot be expensed.
Provided Mobile Cells Inc. expects to recover the MU10,000 commission paid to Eva, the MU10,000 commission must be capitalized, because it is incremental to obtaining the contract with the customer.
Given the commission is incremental provided it is recoverable it must be capitalized, unless it would have been amortized within a year or less, in which case the costs must be expensed immediately.
The correct statement is: "Provided Mobile Cells Inc. expects to recover the MU10,000 commission paid to Eva, the MU10,000 commission must be capitalized, because it is incremental to obtaining the contract with the customer."
According to IFRS 15, the MU10,000 commission paid to Eva is an incremental cost of obtaining the contract with Gabriel, the customer. Since Mobile Cells Inc. expects to recover this cost, it should be capitalized as a contract fulfillment cost, as it is directly related to the contract with Gabriel and increases the resources available for fulfilling the contract over time. However, it's important to note that if the commission would be amortized over a period of one year or less, it should be expensed immediately, following the principles outlined in IFRS 15 on the capitalization of contract acquisition costs.
