Other costs to obtain a contract in the entertainment and media (E&M) industry Deferred cost | Capitalised costs E&M industry
Incremental costs to obtain a contract will be capitalized if they are expected to be recovered. Such costs may be expensed as incurred as a practical expedient if the amortization period of the asset, including the initial contract term plus expected renewals, is one year or less.
Companies may be required to capitalize more costs under IFRS 15, such as certain subscription-based businesses that incur commission or agency costs at the time long-term subscriptions are executed.
Costs subject to capitalization are not just limited to commissions, but also include other costs that are incremental to obtaining the contract with the customer if the company expects to recover those costs, including fringe benefits. Deferred cost | Capitalised costs E&M industry
Companies may need to apply judgment to determine whether there are factors (other than whether a contract is obtained) affecting the amount of the payment, which could indicate the payment is not an incremental cost. For example, a discretionary bonus that is based both on obtaining new contracts and other performance targets is not an incremental cost because there are other factors impacting whether the company will pay the bonus and the amount of the bonus.
IFRS 15 requires companies to amortize capitalized costs on a systematic basis in a manner that is consistent with the transfer to the customer of the goods or services to which the asset relates. Determining the amortization period requires judgment and is similar to estimating the amortization or depreciation period for other assets (such as a customer relationship acquired in a business combination). Deferred cost | Capitalised costs E&M industry
The amortization period is likely longer than the initial contract term if a company expects the customer to renew the contract and does not incur a commission commensurate with the initial commission upon renewal. However, the amortization period could be shorter than the average customer term, depending on the facts and circumstances. Companies should assess whether the asset relates to the goods and services the company expects to provide under future anticipated contracts with the customer.
Other costs to fulfil a contract in the entertainment and media (E&M) industry Deferred cost | Capitalised costs E&M industry
Companies should assess costs incurred to fulfil a contract to determine if the accounting for those costs is in the scope of other applicable guidance. Costs incurred to fulfil a contract that are not in the scope of other applicable guidance are recognized as an asset under IFRS 15 if the costs relate directly to a contract, generate or enhance resources of the company that will be used to satisfy future performance obligations, and are expected to be recovered. Costs capitalized under the new standards will be amortized as control of the goods or services to which the asset relates is transferred to the customer.
Many costs that entertainment and media companies incur classify as costs to fulfil a contract (e.g., the costs of installing newly acquired equipment). IFRS 15 may apply in certain instances to producers that construct assets for studios or other users on a contract basis because those costs do not fall within other literature.
The revenue standards do not significantly affect existing guidance on the accounting for traditional content costs that are developed during the initial creative process and are then expensed as the IP is exploited over time.