ACCA Strategic Professional · Strategic Business Reporting (International) · Revenue
Vega Co is the parent of Lyra Co. Vega agreed a 3-year service contract with a customer and incurred $30,000 of costs to fulfil it, consisting of $12,000 for set-up activities that transfer no service to the customer and $18,000 of direct labour on delivering services already provided. These costs are not within the scope of another standard. How much should Vega capitalise as a contract fulfilment asset?
Vega should capitalise $12,000, the set-up costs. They relate directly to the contract, create resources for satisfying future performance and are recoverable. The $18,000 of labour relates to services already delivered, so it is expensed rather than capitalised.
- A$30,000
- B$18,000
- C$12,000, provided the set-up generates resources used in satisfying future performance obligations, and recoverableCorrect
- D$0, because all fulfilment costs are expensed
Explanation
Fulfilment costs are capitalised only if they relate directly to the contract, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. Set-up costs meet this. The $18,000 of labour relates to services already transferred, so it is expensed as cost of sales as the performance obligation is satisfied. Capitalising $30,000 ignores that the labour relates to past performance.
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