Tele Sales Inc. pay a 5% commission to members of its sales force when they successfully sign up a new contract. Rebecca, a senior sales representative, begins negotiating with a prospective customer Lee-Anne. Rebecca, in her capacity as a Tele Sales Inc. sales representative, incurs MU6,000 in travel costs. Lee-Anne ultimately signs a new contract and as a result Rebecca receives a commission of MU10,000. The pattern of the entity’s transfer of the related goods or services to Lee-Anne is over 18 months. Which one of the following statements is correct?
While Tele Sales 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 Tele Sales Inc. expects to recover the MU10,000 commission paid to Rebecca, 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.
Capitalization of the MU10,000 is an option, not a requirement, if Tele Sales Inc. expect to recover the commission, being an incremental cost of obtaining the contract with Lee-Anne, a 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.
This statement is correct according to the principles of IFRS 15. The commission paid to Rebecca, which is an incremental cost directly related to obtaining the contract with Lee-Anne, should be capitalized if Tele Sales Inc. expects to recover this cost. However, if the commission is expected to be amortized within a year or less from its initial recognition, the cost should be expensed immediately rather than capitalized.
