ASC 340-40 Contract Costs
ASC 340-40 Other Assets and Deferred Costs – Contracts with Customers governs the accounting for costs to obtain and costs to fulfill contracts with customers. It was introduced together with ASC 606. The IFRS equivalent is contained in IFRS 15.
Related Standards
Explanation
Costs to obtain a contract: Incremental costs that would not have been incurred without the contract – typically sales commissions – are capitalized if the company expects to recover them. As a practical expedient, they may be expensed if the amortization period would be one year or less.
Costs to fulfill a contract: Costs not covered by other guidance are capitalized if they relate directly to a contract, generate or enhance resources used to satisfy performance obligations, and are expected to be recovered – for example, certain setup or implementation costs.
Capitalized costs are amortized on a systematic basis consistent with the transfer of the related goods or services, which may include anticipated renewals. They are tested for impairment. Under US GAAP, impairment losses on contract costs may not be reversed; under IFRS 15, reversals are required when conditions improve.
Why It Matters
Commission plans and implementation costs can be material, especially for subscription and long-term contracts. Tracking, amortizing, and testing these assets requires data that links costs to contracts and performance obligations.
Related Terms
ASC 606 · IFRS 15 · Performance Obligation · Practical Expedient
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