Revenue – ifrs 15 handbook

Judgement needed in determining whether cost capitalisation 
criteria are met
IFRS 15.BC308, CF 4.20
Only costs that meet the definition of an asset – i.e. a present economic 
resource controlled by the entity as a result of past events – are capitalised 
under the standard. Judgement may be required to determine whether costs 
enhance a resource that the entity controls. For example, it appears that 
training costs generally do not meet all of the criteria for capitalisation because 
employees are not a resource controlled by an entity.
Judgement needed in determining whether to capitalise learning 
curve costs
IFRS 15.BC312–BC316
The standard may affect the accounting for contracts that have significant 
learning curve costs that decrease over time as process and knowledge 
efficiencies are gained. The Board noted that the standard addresses the 
accounting for the effect of learning curve costs when two conditions exist:
– an entity has a single performance obligation to deliver a specified number of 
units; and
– the performance obligation is satisfied over time. 
The International Accounting Standards Board (the Board) noted that in these 
cases an entity is likely to select a method for measuring progress (e.g. cost-
to-cost method) that would result in more revenue and expense recognised 
earlier in the contract when the first units are produced, because this is when 
more of the costs are incurred. The Board believed that this effect is appropriate 
because of the greater value of the entity’s performance in the earlier part of the 
contract, and if only one unit was sold then the entity would sell it for a higher 
price. Further, when control passes to the customer as costs are incurred, it 
would be inappropriate to capitalise those costs because they relate to past 
performance. Therefore, if these conditions exist and the cost-to-cost method is 
used, then generally learning curve costs will not be capitalised.

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7 Contract costs | 183
7.2 Costs of fulfilling a contract
| 
IAS 2
In other cases, if the contract is for multiple performance obligations (e.g. 
selling multiple goods or products, such as multiple pieces of equipment or 
machinery) that are each satisfied at a point in time (e.g. on transfer of control 
of the good), then an entity will principally account for the costs of these 
performance obligations under other standards, such as inventory guidance. 
This is because an entity incurring costs to fulfil a contract without also 
satisfying a performance obligation over time is probably creating an asset in 
the scope of other guidance (e.g. inventory).