IFRS 15 Contract Costs

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nelsonhong
Posts: 4
Joined: 07 Jan 2021, 15:38

IFRS 15 Contract Costs

Post by nelsonhong »

Hi, may I ask for some comments regarding the below scenario in the
sales commission.

I work in a project-based company, and we pay sales commission (10% flat
rate on the gross margin of the sales (sales minus expected costs)) as
incremental costs to fulfil a contract. We usually amortize the commission
within a year if the sales project is done within the same year; and for
projects that is to be completed in several years, we recognise contract
cost assets in the balance sheet and amortize the cost throughout the life
of the project.

Now, my company plans to incorporate the overdue receivable factors into
the sales commission calculation. Instead of just merely paying 10% flat
rate on the gross margin, we now plan to pay 5% of the gross margin upon a
sales is made, and the remaining 5% of the gross margin will be paid upon
AR is being settled by the customer. That is, for example a sales is made
($10,000 gross margin), the sales rep will be firstly paid $500 sales
commission, and the remaining 5% ($500) will be paid to the sales rep based
on the % of accounts receivable being paid off by the customer.

In this case, if a project is to be completed within 5 years and customer
will pay off the whole accounts receivable balance within 5 years, how
should I do the accounting entry in this case? I assume for the $500 sales
commission initially paid in the first year, I will have to book contract
cost for the $400 (being the commission relating to year 2-5 and amortize
respective during year 2-5). What about the remaining $500 that is to be
paid to the sales rep based on the accounts receivable? Since the remaining
$500 may be a variable consideration and may be impaired according the AR
bad debit, do I have to do impairment test on it annually, or am I even
allowed to make an accrual for the remaining $500 sales commission if it is
not being paid to the sales rep upon the sales is made?

Thanks,
Nelson
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Marek Muc
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Re: IFRS 15 Contract Costs

Post by Marek Muc »

it seems to me that the deferred part is too an incremental cost of obtaining a contract, so I would recognise it immediately, something like this:
DR contract cost
CR employee payable

and amortise it under general terms

subsequent changes, if any, would go to other income:
DR employee payable
CR other income

What was even the reason for such a change? Did you see high rate of fraudulent contracts?
nelsonhong
Posts: 4
Joined: 07 Jan 2021, 15:38

Re: IFRS 15 Contract Costs

Post by nelsonhong »

Yes, noticed that there are many outstanding ARs....

So you are saying that, even though that the remaining 5% commission that the sales rep is not currently entitled (due to AR not being collected), should also be booked in the 1st year and amortize over the project life, and to be restated (reduced) if there's impairment in AR respectively?

Thanks.
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Marek Muc
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Re: IFRS 15 Contract Costs

Post by Marek Muc »

That's right. This is assuming that the probability of payment criterion is satisfied in the first place

https://ifrscommunity.com/knowledge-bas ... of-payment
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