When awarding a contract, companies sometimes incur costs that would not have been incurred without the contract. Many different costs may meet this definition; However, the most common example of this type of cost is a final price commission. Depending on the facts and circumstances, these additional costs are sometimes recorded as assets and sometimes as expenses. 25-2: The additional cost of obtaining a contract is the cost incurred by a company to obtain a contract with a customer that it would not have incurred if the contract had not been received (for example. B a sales commission). Incremental costs help determine where profits are maximized for a business or when marginal costs are limited. If a company generates more additional revenue (or marginal revenue) per product than the additional cost of manufacturing or purchasing that product, it makes a profit. The Consolidation of Accounting Standards (CSA) 340 describes the requirements for incremental costs. In particular, ASC 340-40-25-1 to 25-4 states that Company A must determine whether both commissions are reasonable. Since the commissions are the same and refer to equivalent contracts, they are reasonable.
The repayment of the $5,000 commission on the original contract would only be three years. The $5,000 renewal fee would be amortized over the three-year renewal period. Additional costs are relevant for making short-term decisions or choosing between two alternatives, for example. B may or may not accept a special order. If a reduced price is set for a special order, it is important that the income from the special order covers at least the additional costs. Otherwise, the special order will result in a net loss. As a practical tool, the standard allows companies to opt for additional costs if the payback period is one year or less. Although not explicitly stated in the Standard, some companies believe that if companies choose this approach, it would be considered an accounting policy and valuation choice and that the same approach should be applied to all costs of acquiring similar short-term contracts (the choice of policy may only be relevant for similar contracts and not for the entity as a whole). The Company has an internal sales compensation program where compensation is based solely on revenues recognized during the period and does not represent additional costs to the Company that provide future benefits that are expected to be greater than one year and that would meet the criteria to be capitalized and reported as a contractual asset on the Company`s consolidated balance sheets. (April 2020) Assuming that each financial contract depends on risk factors K and that the money is invested at the risk-free interest rate r, which is a variable that also depends on stochastic factors, it can be demonstrated[1] that the Company has collectively entered into that any commission tranche for a multi-year research subscription client agreement, including subsequent renewals, should be activated at the beginning of the corresponding performance period. and are amortized prospectively on a basis that can be calculated over a period not exceeding one year.
By consistently applying this methodology, deferred commissions are amortized over a period consistent with the transfer of services to which the asset relates to the customer, and the resulting depreciation expense is directly consistent with the entity`s revenue recognition model. (January 2020) An unavoidable obligation to pay additional costs arose from entering into a contract with a customer? CSA 340-40 requires companies to capitalize on the additional costs of entering into a contract with a customer if the costs should be covered. The new revenue standard defines additional costs related to obtaining a contract as ”the costs incurred by a company to obtain a contract with a customer that it would not have incurred if the contract had not been received.” The most common example of additional costs for obtaining a contract is a final price commission paid by a company to its employees. However, a company should not assume that all types of commissions are capitalizable according to the new income standard. Instead, a company must assess whether it is exclusively a contract with a customer (i.e., whether the costs incurred are additional costs for obtaining such a contract). Often, a company can identify the additional costs associated with entering into a contract with a customer by asking the following question: A judgment is required to determine the period during which the additional capitalized costs will be cancelled if there are planned renewal contracts. .