Strategic Business Reporting (International) · Revenue

IFRS 15 Contract Costs, Contract Modifications and Presentation

Updated 11 October 2026 · Fact-checked

Under IFRS 15, you capitalise incremental costs of obtaining a contract and costs of fulfilling it if specified conditions are met, then amortise them. A contract modification is a separate contract or is accounted for prospectively or by cumulative catch-up. You present contract assets, receivables and contract liabilities on the statement of financial position.

Understand Contract Costs, Contract Modifications and Presentation

IFRS 15 deals with more than recognising revenue. It also covers the costs a seller spends to win and deliver a contract, what happens when the contract is changed, and how the balances are shown in the statement of financial position.

Costs to obtain a contract. Only incremental costs are capitalised. These are costs you would not have incurred if the contract had not been won, such as a sales commission. Costs you incur anyway, such as bid preparation, legal fees for a tender or travel, are expensed unless the customer explicitly agrees to pay them. As a practical expedient, you may expense the cost if the amortisation period would be one year or less. Capitalised costs are recovered over the period the related goods or services are transferred, and are tested for impairment.

Costs to fulfil a contract. First apply other standards, such as IAS 2, IAS 16 and IAS 38. If none applies, capitalise the costs only if all three conditions are met: they relate directly to a contract or a specific anticipated contract, they generate or enhance resources used to satisfy future performance obligations, and you expect to recover them. General overheads, wasted materials and costs relating to satisfied performance obligations are expensed.

Contract modifications. A modification is a change in the scope or price of a contract that both parties approve. It is a separate contract if it adds distinct goods or services and the price rises by an amount reflecting their standalone selling prices. If not, and the remaining goods or services are distinct from those already transferred, you treat it as a termination of the old contract and creation of a new one (prospective). If the remaining goods or services are not distinct and form part of a single performance obligation that is partly satisfied, you adjust revenue with a cumulative catch-up at the modification date.

Presentation. A contract asset is your right to consideration for goods or services already transferred when that right depends on something other than the passage of time. A receivable is an unconditional right, where only time must pass. A contract liability is your obligation to transfer goods or services for which you have received payment or the amount is due. Contract assets and liabilities are shown net per contract, never netted across contracts.

Key rules to remember

Costs to obtain a contract: Capitalise if incremental and expected to be recovered; otherwise expense; Practical expedient: expense if the amortisation period is one year or less.
Costs to fulfil a contract (all three needed): Directly related + generates or enhances resources + expected to be recovered; Apply IAS 2, IAS 16 or IAS 38 first if they cover the cost.
Amortisation of capitalised costs: Amortise on a systematic basis consistent with transfer of the related goods or services; Include anticipated renewals if the cost relates to them.
Impairment of capitalised costs: Impairment = carrying amount of the cost asset − (remaining consideration expected, less costs directly related to providing the goods or services); Recognise the excess in profit or loss; reverse if conditions improve, up to the amount without impairment.
Modification as separate contract: Distinct additional goods or services AND price increase = standalone selling price (adjusted for circumstances); If both met, account for the new items as a new contract.
Modification not separate, remaining items distinct: Prospective: remaining consideration allocated to remaining distinct items; Past revenue is not changed.
Modification not separate, remaining items not distinct: Cumulative catch-up: revised progress × revised price − revenue recognised to date; Adjust revenue at the modification date.
Contract asset, receivable and contract liability: Unconditional right = receivable; conditional right = contract asset; payment received or due ahead of performance = contract liability; Net asset or liability is presented per contract.

How to solve Contract Costs, Contract Modifications and Presentation questions

Use this order for any question on costs, modifications or presentation. Write the conclusion for each step in one line so the marker can follow it.

1Identify what the question tests: costs, a modification, presentation, or a mix.
2For costs, ask if they are incremental to obtaining the contract. If yes, capitalise (unless the one-year expedient applies). If they are fulfilment costs, check whether IAS 2, IAS 16 or IAS 38 applies first, then the three IFRS 15 conditions.
3Set the amortisation pattern to match transfer of goods or services, and test for impairment at the reporting date.
4For a modification, check approval and enforceability, then test whether the added items are distinct and priced at standalone selling price.
5Choose the treatment: separate contract, prospective, or cumulative catch-up. Calculate the revised revenue and the adjustment.
6Classify balances: unconditional right is a receivable, conditional right is a contract asset, payment received ahead of performance is a contract liability.
7Show journals or the extract and state the effect on profit and the statement of financial position.
8Apply the scenario: comment on judgement, disclosure or any ethical concern, such as aggressive capitalisation.

Quickest way: Three-question triage

When to use it: Use when time is short and you need the right treatment fast.

Costs: would the cost exist without winning the contract? Yes means capitalise (if recoverable). No means expense, unless it is a fulfilment cost meeting all three conditions.
Modification: is it distinct and at standalone selling price? Yes means a new contract. No: are the remaining items distinct? Yes means prospective. No means catch-up.
Balance: has the customer paid before you perform? Contract liability. Have you performed with only time left before payment? Receivable. Have you performed but need something else first? Contract asset.

Common mistakes in Contract Costs, Contract Modifications and Presentation

Capitalising all costs of a bid, such as legal and travel costs of tendering.
Students assume any cost linked to winning a contract is an asset.
Fix: Only incremental costs (for example commissions payable only if the contract is won) qualify. Expense the rest unless the customer reimburses them.
Treating every price increase on a modification as a separate contract.
Students look only at the extra price and ignore whether the price equals standalone selling price.
Fix: Test both conditions: distinct goods or services and a price reflecting standalone selling prices. If either fails, it is not a separate contract.
Using cumulative catch-up when the remaining goods are distinct.
Students confuse the two non-separate treatments.
Fix: If remaining goods or services are distinct from those already delivered, adjust prospectively. Use catch-up only when they are not distinct.
Calling a conditional right to payment a receivable.
Students think any amount owed is a receivable.
Fix: A receivable is unconditional, with only time to pass. If payment depends on another performance obligation or milestone, it is a contract asset.
Netting contract assets against contract liabilities across different contracts.
Students want to show one neat figure.
Fix: Net only within a single contract. Present the totals of net assets and net liabilities separately.
Forgetting to amortise capitalised costs or test them for impairment.
Students stop once the asset is recognised.
Fix: Always include the amortisation charge and state that the asset is tested for impairment at each reporting date.

Worked examples

Example 1

On 1 January 20X1, Rani Co signs a three-year service contract with a customer for $900,000 in total ($300,000 a year). Rani pays a sales agent a commission of $45,000 that was payable only because the contract was won. It also spent $20,000 on legal fees for the tender and $10,000 on travel. The contract is expected to be renewed once, for one further year, and the commission is not paid on renewal. Assume services are delivered evenly across the 4 years, including the expected renewal year. Explain the accounting for these costs for the year ended 31 December 20X1.

Show the solution

The commission is incremental because it arose only from winning the contract, so capitalise $45,000.
The legal fees ($20,000) and travel ($10,000) would be incurred whether or not the contract was won, and are not reimbursed by the customer. Expense $30,000 in profit or loss.
Amortisation period: no commission is paid on renewal, so the initial commission is not commensurate with the renewal commission (which is nil). The cost therefore relates to the anticipated renewal as well as the original term, and is amortised over both. The assumption is that the renewal is expected, even though it is not yet contracted. The expected period of transfer is 3 years plus 1 renewal year, which is 4 years in total. The one-year expedient does not apply.
Annual amortisation = $45,000 ÷ 4 = $11,250, because services are assumed to be delivered evenly across the 4 years.
At 31 December 20X1: contract cost asset = $45,000 − $11,250 = $33,750. Test it for impairment against remaining expected consideration less costs to provide the services.

Answer: Capitalise the $45,000 commission and amortise it over 4 years, giving $11,250 for 20X1 and an asset of $33,750. Expense the $30,000 of tender legal and travel costs.

Example 2

Tala Co contracts to build a bespoke machine for $600,000 with expected total costs of $400,000. Revenue is recognised over time using costs incurred as the measure of progress. At the end of 20X1, costs incurred are $200,000 and no invoice has yet been issued. In 20X2, before completion, the customer asks for a design change which increases the price by $60,000 and expected total costs by $50,000. The change is not distinct from the original machine. Total costs incurred at the end of 20X2 are $360,000, and invoices of $500,000 have been issued by then and all paid. Calculate the revenue for 20X1 and 20X2, and show the 20X2 closing balance.

Show the solution

20X1: progress = 200,000 ÷ 400,000 = 50%. Revenue = 50% × $600,000 = $300,000. No invoice, so a contract asset of $300,000 arises (right to payment is conditional on completing the machine).
Modification: the change is not distinct, so it is part of a single performance obligation already partly satisfied. Use cumulative catch-up.
Revised price = $600,000 + $60,000 = $660,000. Revised expected costs = $400,000 + $50,000 = $450,000.
20X2 progress = 360,000 ÷ 450,000 = 80%. Cumulative revenue = 80% × $660,000 = $528,000.
20X2 revenue = $528,000 − $300,000 = $228,000. This includes the catch-up adjustment.
Closing balance: $500,000 has been invoiced and received, so those amounts were unconditional receivables that have been settled in cash. The remaining unbilled revenue is $528,000 − $500,000 = $28,000. This is a contract asset, because the right to payment is conditional on Tala completing the machine (performance), not on further invoicing. Invoicing is only the passage of time. The amount would become a receivable only once the right to it is unconditional.

Answer: Revenue is $300,000 in 20X1 and $228,000 in 20X2 (cumulative $528,000). At the end of 20X2 there is a contract asset of $28,000, being revenue recognised but not yet invoiced. It is a contract asset because the right to payment depends on completing the machine.

Exam tips

Mention the specific test you apply, such as incremental cost or distinct goods at standalone selling price. Markers award marks for naming the criteria and applying them to the facts.
In modification questions, state the three outcomes, then pick one and explain why the others fail.
Show the working for catch-up: revised progress × revised price − revenue to date. A clear method earns marks even if the arithmetic slips.
Use the IFRS 15 terms in presentation: contract asset, receivable, contract liability. IFRS 15 permits other descriptions for these balances, such as deferred income or accrued income, but the IFRS 15 terms are the safest choice in the exam.
Link the scenario to professional skills: if management capitalises costs aggressively to lift profit, challenge it with scepticism and mention the ethical risk.

Practice questions from Revenue

Contract Costs, Contract Modifications and Presentation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Contract Costs, Contract Modifications and Presentation: frequently asked questions

Can I capitalise all costs of winning a contract under IFRS 15?

No. You capitalise only incremental costs, which are costs that would not exist if the contract had not been won, such as sales commissions. Other costs, such as tender preparation, are expensed unless the customer is to reimburse them. You can also expense the cost if the amortisation period is one year or less.

What is the difference between a contract asset and a receivable?

A receivable is an unconditional right to consideration, where only the passage of time is needed before payment is due. A contract asset is a right to consideration that depends on something other than time, such as completing another performance obligation. Contract assets are also assessed for impairment under IFRS 9.

How do I decide how to account for a contract modification?

First check whether it adds distinct goods or services at a price reflecting standalone selling prices. If so, it is a separate contract. If not, check whether the remaining goods or services are distinct from those already delivered. If they are, adjust prospectively. If they are not, use a cumulative catch-up.

When is a contract liability recognised?

You recognise a contract liability when the customer has paid, or payment is due, before you transfer the goods or services. It is released to revenue as you perform. A single contract is presented as either a net contract asset or a net contract liability, never both. Do not net balances across different contracts.