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Dear sir,
Under contract costs, they mention that the costs have to be capitalised if certain criteria are met. As far as I understand, the capitalised cost of contract are shown as receivables, payables, contract asset and contract liability.
1) Wouldnt the capitalised amount be the amount receivable from the contract (including the profit) – the contract price?
2) They mention that the capitalised cost would be amortised over the period. Are receivables amortised? Won’t they have only provisions?
Thanks
1) No, we only capitalise a proportion of the contract value – dependent upon the terms of the contract, the stage reached and, crucially, IFRS 15
2) Who is ‘they’ as in “2) They mention that the capitalised cost would be amortised over the period.”
What I meant by ‘they’ was the standard. This line is mentioned in the notes, textbook and the notes (PG-137)
And, I was struggling to understand what exactly is the cost of obtaining the contract really is and why would it need to be capitalised?
A lot of work has to go into preparing submissions and tenders to obtain work
Even in the world of accountancy there is a tremendous amount of preparatory work involved in creating a presentation to submit as a tender document when trying to win a new client
These are the costs to be capitalised and amortised
Is that better?
Yes sir. One more thing. Would the rules apply to fulfilling the contract as well?
The recognition of revenue and related costs throughout the period of the contract makes your question non-applicable
As the contract progresses the total contract revenue and the total contract costs are spread over the life of that contract so … I’m not really sure that I could begin to “apply the same rules to the fulfillment of the contract”
OK?
Most unlikely – but the course notes are pretty good so you shouldn’t be overwhelmed by the topic
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