Contract acquisition and fulfilment costs under Ind AS 115 are easy to misclassify because the payment often looks like an ordinary selling or project expense. The accounting question is more specific: did the entity incur the cost only because it obtained the customer contract, or did the cost create a resource for satisfying future performance obligations? Depending on that answer, the amount may be recognised as an asset rather than expensed immediately.
The first-party starting point is ICAI’s Educational Material on Ind AS 115. ICAI also maintains the dedicated Ind AS 115 publication page. Finance teams should analyse the underlying customer contract before deciding the journal entry.
Two different buckets: obtain and fulfil
Ind AS 115 separates contract costs into two questions. Costs to obtain a contract are tested primarily by whether they are incremental: would the entity have incurred the cost if it had not won the contract? Costs to fulfil a contract are tested by whether they create or enhance resources that will be used to satisfy future performance obligations, provided another Standard does not already govern the cost.
When a cost of obtaining a contract becomes an asset
Ind AS 115 requires an entity to recognise the incremental costs of obtaining a customer contract as an asset when it expects to recover those costs. An incremental cost is one that would not have been incurred if the contract had not been obtained. A classic example is a success-based sales commission payable only when the customer signs the contract.
Costs that would have been incurred whether the bid succeeded or failed are generally expensed as incurred, unless they are explicitly chargeable to the customer regardless of whether the contract is obtained. Bid-team salaries, proposal travel and many tender or due-diligence costs therefore need a “would we have incurred this if we lost?” test rather than automatic capitalisation.
The one-year practical expedient
An entity may expense an otherwise capitalisable incremental cost of obtaining a contract when the amortisation period of the asset would be one year or less. If the expedient is used, it should be applied consistently and disclosed as required by the Standard.
When fulfilment costs can be capitalised
Fulfilment costs are analysed only after checking whether another Standard applies. Inventory, property, plant and equipment or intangible-asset requirements may govern the cost first. If no other Standard applies, an asset is recognised only when all three conditions are met:
- the costs relate directly to a contract or specifically identifiable anticipated contract;
- the costs generate or enhance resources that will be used to satisfy future performance obligations; and
- the costs are expected to be recovered.
Directly related costs can include direct labour, direct materials, allocations of contract-related supervision or equipment costs, amounts explicitly chargeable to the customer, and other costs incurred only because the entity entered into the contract. A customer contract alone, however, does not make every project cost eligible.
Which costs are normally expensed?
Ind AS 115 identifies costs that should be expensed when incurred, including general and administrative costs unless explicitly chargeable to the customer, abnormal or wasted materials and labour not reflected in the contract price, costs relating to performance obligations already satisfied, and costs where the entity cannot distinguish whether they relate to past or future performance.
This matters during mobilisation. A cost incurred before billing starts is not automatically a “prepaid project cost.” The finance team must show that it relates to future performance and creates or enhances a resource used to satisfy that performance.
Worked example: tender, commission and mobilisation
Assume a consulting company bids for a two-year customer contract. It incurs ₹80,000 of proposal travel and ₹1,20,000 of legal review that would have been incurred even if the bid failed. It also promises a ₹3,00,000 commission to the salesperson only if the contract is won. After signing, it incurs ₹2,00,000 of dedicated mobilisation work directly connected to future services and meeting the fulfilment-cost criteria.
The proposal travel and bid-stage legal review are generally expensed because they are not incremental to obtaining the contract. The success commission is an incremental cost of obtaining the contract and, assuming recovery is expected and the one-year practical expedient does not apply or is not elected, is recognised as a contract-cost asset. The mobilisation cost may also qualify as an asset if no other Standard applies and all fulfilment criteria are met.
How the contract-cost asset is amortised
A recognised contract-cost asset is amortised on a systematic basis consistent with the transfer to the customer of the related goods or services. The pattern therefore follows performance rather than an arbitrary accounting period. If expected transfer timing changes significantly, the amortisation is updated and the change is treated as a change in accounting estimate under Ind AS 8.
For services transferred evenly over two years, a time-based pattern may often be appropriate. If performance is uneven, equal monthly amortisation should not be used automatically.
Impairment cannot be ignored
Ind AS 115 requires an impairment loss in profit or loss when the carrying amount of the contract-cost asset exceeds the remaining consideration the entity expects to receive for the related goods or services, less directly related costs not already recognised as expenses.
If the impairment conditions later improve, some or all of the earlier impairment loss may be reversed, but the restored carrying amount cannot exceed the amount that would have existed, net of amortisation, had no impairment been recognised.
Disclosure and close-process checklist
The Standard also requires disclosure about assets recognised from costs to obtain or fulfil customer contracts, including relevant judgements, amortisation methods, closing balances by main category, and amortisation and impairment recognised during the reporting period.
- Map each cost to the contract. Identify whether it arose before award, because of award, or while fulfilling future obligations.
- Apply the incremental test. Ask whether the cost would exist if the contract were not obtained.
- Check other Standards first. Do not use Ind AS 115 where another Standard already governs the cost.
- Test all fulfilment criteria. Direct relationship alone is insufficient.
- Separate past-performance costs. Work already delivered should not remain as a future contract-cost asset.
- Link amortisation to performance. Use the transfer pattern of the related goods or services.
- Review impairment. Reassess recoverability when customer or contract economics weaken.
- Reconcile and disclose. Track additions, amortisation, impairment, reversals and closing balances.
Common mistakes
- Capitalising all tender costs because the bid was ultimately successful.
- Expensing every sales commission without checking whether it is incremental and recoverable.
- Capitalising general overhead merely because it has been allocated to a contract.
- Ignoring another Standard that already governs the underlying cost.
- Keeping mobilisation costs on the balance sheet after the related performance has occurred.
- Using straight-line amortisation without linking it to the transfer pattern.
Practical takeaway
Ind AS 115 does not permit a broad “contract-related cost equals asset” approach. Separate acquisition from fulfilment, capitalise only qualifying incremental acquisition costs or future-oriented fulfilment costs, expense amounts that fail the tests, amortise the asset in line with related performance, and revisit recoverability at each reporting date. A short contract-cost memo recording the cost, test, conclusion and amortisation basis can turn a judgement-heavy area into a repeatable month-end control.
