Revenue – ifrs 15 handbook

Anticipated contracts included when determining whether 
practical expedient applies
Under the standard, an entity assesses the amortisation period to determine 
whether it is eligible to apply the practical expedient not to recognise an asset 
for the incremental costs to obtain a contract (costs to fulfil a contract are not 
eligible for the practical expedient). For example, a cable television company 
incurs incremental costs to obtain contracts with customers that have an initial 
term of one year. However, a significant proportion of customers renew the 
contracts at the end of the initial term. In this case, the company cannot assume 
that it is eligible for the practical expedient, but instead has to determine the 
amortisation period.

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7 Contract costs | 189
7.3 Amortisation
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Judgement is required when contracts include recurring 
commissions
Some entities pay sales commissions on all contracts executed with 
customers, including new contracts – i.e. new services and/or new customers 
– and renewal or extension contracts. If the commission paid by an entity on a 
new contract will be followed by corresponding commissions for each renewal 
period – i.e. the salesperson will receive an incremental commission each time 
the customer renews the contract or does not cancel it – then the entity applies 
judgement to determine whether the original commission on the new contract 
should be amortised only over the initial contract term or over a longer period. 
The capitalised asset is generally recognised over the period covered by the 
commission. If the renewal commission is commensurate with the initial 
commission, then the initial commission is amortised over the original contract 
term and the renewal commission is amortised over the renewal period. 
Commissions are generally considered commensurate with each other when 
they are reasonably proportional to the respective contract value.
When making the ‘commensurate’ evaluation, an entity considers whether the 
economic benefits that it expects to obtain from payment of the commission 
− i.e. the margin that it expects to earn from providing the good or service – is 
commensurate with the commission paid. Therefore, when an entity’s expected 
economic benefits from providing services during a renewal period are 
commensurate with those from providing the same services during the initial 
period, the renewal and initial commissions that will be paid should be roughly 
equal to be considered commensurate with each other.
When the renewal commission is not commensurate, there are two acceptable 
approaches to amortise the capitalised asset, as long as the approaches are 
consistently applied to substantially similar circumstances.
– The entire capitalised asset is amortised over the period that includes the 
specifically anticipated renewal periods. 
– Only the portion of the capitalised asset that is incremental to the renewal 
commission that the entity would normally pay is amortised over the period 
that includes the specifically anticipated renewal periods.