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ACCA Applied Skills · Financial Reporting · Revenue

Brill Co provides a 4-year managed IT service for $400,000, with services delivered evenly. Before service starts, Brill spends $60,000 on set-up activities (configuring systems) that do not transfer a service to the customer but generate resources used to satisfy the performance obligation and are expected to be recovered. At the end of year 1, what is the carrying amount of the capitalised contract fulfilment cost, assuming amortisation is straight-line over the contract term?

The carrying amount is $45,000. The set-up costs generate resources used to satisfy the obligation and are recoverable, so they are capitalised. Amortising $60,000 over four years charges $15,000 in year 1, leaving $45,000 at the year end.

  1. A$60,000
  2. B$45,000Correct
  3. C$15,000
  4. D$0

Explanation

The set-up costs meet the IFRS 15 criteria for capitalisation as costs to fulfil a contract. They are amortised over 4 years at $15,000 per year in line with the transfer of services. After year 1 the carrying amount is $60,000 - $15,000 = $45,000. Expensing all at once ($0) ignores the capitalisation criteria.

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