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MEMBER OF ALLINIAL GLOBAL, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS © 2018 Wolf & Company, P.C.
Costs to Acquire and Costs to
Fulfill
July 12, 2018
• Today’s presentation slides can be downloaded at
www.wolfandco.com/webinars/2018.
• The session will last about 45 minutes, and we’ll then
have time for Q & A.
• Our audience will be muted during the session.
• Please send your questions in using the “Questions
Box” located on the webinar’s control panel.
2
Before we get started…
About Wolf & Company, P.C.
• Established in 1911
• Offers Audit, Tax, and Risk Management Services
• Offices located in:
– Boston, Massachusetts
– Springfield, Massachusetts
– Albany, New York
– Livingston, New Jersey
• Over 250 professionals
As a leading regional firm founded in 1911, we provide our clients
with specialized industry expertise and responsive service.
3
Introduction
Scott Goodwin, CPAMember of the Firm and Technology Services Team Leader
• E-mail: [email protected]
• Phone: (617) 428-5407
Cecilia Frerotte, CPAAudit Principal and Software Sector Leader
• E-mail: [email protected]
• Phone: (617) 261-8186
4
Agenda
• Scope and locating the guidance
• Costs to obtain a contract
• Costs to fulfill a contract
• Amortization periods and impairment
• Questions and wrap-up
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The Five Step Model
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Core Principle
Recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services
Scope Issues
• Intention of this new guidance
– Fill some gaps in current guidance
– Improve consistency
– Provide more explicit guidance
• Interaction with existing guidance
– Need to consider all existing guidance first
– Only costs that are not covered by other guidance need to
be considered under this guidance
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Costs to Obtain
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Important concepts:
1. Incremental
2. Recoverable
3. Even if not incremental, still need to consider the fulfillment cost
guidance
Capitalize costs
Would the costs be incurred regardless of whether the contract is
obtained?
They are incremental costs.
Are the incremental costs expected to be recovered?
Do the costs meet the criteria to be capitalized as
fulfillment costs?Expense costs as they
are incurred.
No
No
No
Yes
Yes
Yes
Costs to Obtain
Question – what costs to obtain a contract are “incremental”?
Answer –
• Incremental if, and only if, it is the act of both parties approving the
contract that triggers the liability
• Costs incurred before this act are generally not going to be
incremental
– Sales efforts or costs of negotiating a contract undertaken
before a contract is approved would not be incremental
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Costs to Obtain
Question - If a commission will be paid only as SaaS Co.
invoices the customer, but there are no performance
requirements for the salesperson after SaaS Co. obtains the
contract with the customer, is the entire commission an
incremental cost of obtaining a contract at contract inception?
Answer –
• Yes.
• The timing of the payment does not impact whether it is
incremental or not.
10
Costs to Obtain
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Question – Is a payment that depends partially on obtaining a
contract an “incremental” cost?
Answer –
• No. Only if the payment is due solely as a result of obtaining a
contract would it be considered incremental.
• Fixed amounts (eg. sales manager’s bonus) would not be
incremental even if based on assumed levels of sales activity
• Payments tied to an operating metric (eg. operating income) would
not be incremental even if the metric is substantially driven by sales
Costs to Obtain
Question – Are commissions that are payable based on
obtaining a contract but also require additional performance by
the salesperson “incremental”?
Answer –
• It depends
• If a liability is incurred, the cost would not have been incurred if the
contract had not been obtained. Therefore, incremental
• If liability is triggered by some other action, cost not incremental
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Costs to Obtain
Scenario 1 -
SaaS Co. signs a three-year contract with Customer. SaaS
Co. agrees to pay salesperson a $60,000 commission in three
(3) installments of $20,000 each. Commission installments
are paid at the beginning of each contract year. Salesperson
must be employed by SaaS Co. at the time in order to receive
the commission.
What is the accounting for SaaS Co.’s commission?
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Costs to Obtain
Scenario 1 –
• Since there is a performance requirement for both the 2nd
and 3rd installment, these would not be accrued
• When and if these amounts are earned/accrued, they would
not be incremental costs of obtaining the contract
• Only the initial $20,000 commission would be considered an
incremental cost of obtaining the contract
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Scenario 2 –
SaaS Co.’s vice president of sales receives a quarterly bonus
based on meeting a specified revenue target that is established
at the beginning of each quarter.
Is the quarterly bonus considered an incremental cost to obtain
a contract?
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Costs to Obtain
Scenario 2 –
• It depends
• If bonus is based on factors other than obtaining new
contracts, cost would not be incremental
• If based solely on a target of new contracts, would likely be
considered incremental
– Essentially a delayed commission payment
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Costs to Obtain
Costs to Obtain
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Practical expedient –
• You are not required to capitalize incremental costs of obtaining a
contract if the amortization period of the contract asset would be
one year or less
• Applies only to costs to obtain a contract rather than cost to fulfill a
contract
• This is a policy election
• Generally expected that this policy election would be made on an
entity-level basis
Costs to Fulfill a Contract
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Important concepts:1. Direct
2. Enhancement of resources to fulfill performance obligation
3. Recoverable
Capitalize costs
Are the costs incurred in fulfilling the contract in
the scope of other topics?
Are the costs direct, recoverable and do they
enhance resources to fulfill a performance
obligation?
Apply other topics
Expense costs as they
are incurred.
Yes
Yes
No
No
Costs to Fulfill a Contract
Costs may include:
a. Direct labor & Materials
b. Allocation of costs (insurance, depreciation, supervision)
c. Costs that are explicitly chargeable to the customer under the
contract
d. Other incurred only because entity entered into the contract
(subcontractors)
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Costs to Fulfill a Contract
Costs may NOT include:
a. General and administrative
b. Costs of overages or wasted materials
c. Costs that relate to satisfied (or partially satisfied) performance
obligations (past performance)
d. Costs that are not distinguishable between performance
obligations (if some are satisfied or partially satisfied)
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Costs to Fulfill a Contract
Question - Are direct costs incurred in satisfying a
present performance obligation eligible for
capitalization?
Answer -
• Generally no. In order for fulfillment costs to be
capitalizable, the costs must generate or enhance
resources of the entity that will be used in satisfying
performance obligations in the future.
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Costs to Fulfill a Contract
Scenario 3
Sample Co. enters into a contract to provide Customer with access to its
SaaS for a term of 3 years.
As part of the contract, before commencement of the SaaS term, Sample Co
will set up the user interface that Customer will need to access the online
application, and will also undertake data conversion and migration activities
for Customer to configure and move its relevant, existing data from
Customer’s current on-premise solution to Sample Co’s hosted environment.
Sample Co will also provide training to relevant Customer personnel for
efficient use of Sample Co’s hosted application.
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Amortization and Impairment
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Amortization
• Systematic basis that is consistent with the transfer of the goods or
services to the customer
• Two or more performance obligations with different pattern of
transfer
– Allocate contract costs on a systematic and rational basis OR
– Select a single measure that best reflects ‘use’ of the asset as
the goods and services are transferred
Amortization and Impairment
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Question - When should capitalized cost assets be amortized
over a period that is longer than the specified contract period –
i.e. include specifically anticipated renewal periods?
Answer -
• Yes, the amortization period for a contract cost asset should
include specifically anticipated renewal periods when the
entity concludes that it will continue to benefit from the
contract cost asset.
Amortization and Impairment
Scenario 4
Sample Co enters into a one-year contract with a customer to
provide data management services through a SaaS platform
for an amount of $10,000 per month. Sample Co incurs set-up
costs of $15,000 directly related to the contract. The set-up
costs are not incurred again if the subscription is renewed by
the customer.
Sample Co. anticipates, based on relevant customer-specific
facts and other relevant circumstances, that the customer will
renew the contract for an additional three years.
Amortization and Impairment
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Impairment
Recognized if carrying amount of asset exceeds the recoverable
amount
• Expected future consideration and consideration received but not
recognized as revenue, less
• Costs that directly relate to performance obligations that have not
been recognized as expenses
Questions?
Scott Goodwin, CPA
Member of the Firm and Technology Services Team Leader
• E-mail: [email protected]
• Phone: (617) 428-5407
Cecilia Frerotte, CPAAudit Principal and Software Sector Leader
• E-mail: [email protected]
• Phone: (617) 261-8186
27
Upcoming webinars
This is the third in a 4-part series on ASC 606
Join us on Tuesday July 24 at 10am for Part 4:
Step 5 including Licenses of IP
