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Page | 41 Capitalized Costs to Obtain a Contract > ASC 340-40-25-1 states that the costs of obtaining a contract should be recognized as an asset if the costs are incremental and are expected to be recovered. Incremental costs of obtaining a contract – these are costs that the contractor would not have incurred if the contract had not been awarded to the contractor. These costs are to be capitalized on the balance sheet and then amortized on a basis consistent with the transfer of the goods or services to which the amounts relate. Note that the unamortized costs are to be evaluated for impairment. The word to focus on is "incremental." A typical (and almost exclusive) cost that a construction entity will incur that will be considered an incremental cost to obtain a contract will be a sales commission. The key is that to be a transaction of this type, the cost would not be incurred if the contract were not obtained (not that the contract is pursued). The Revenue Recognition Transition Resource Group (TRG) minutes refl ect the concept that if immediately prior to signing the contract a cost has been incurred it would not meet this defi nition. Practical Application Note: Costs incurred for a contract that is not yet awarded should be capitalized based on the likelihood of recovery. Practical Application Note: As a practical expedient, an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. COSTS TO BE RECOGNIZED AS EXPENSES WHEN INCURRED The following items are NOT considered incremental costs of obtaining a contract and thus should be evaluated for proper accounting treatment: • Costs such as the salesperson's salary, travel costs incurred in negotiations, marketing, and proposal costs do not meet the criteria because those costs would have been incurred regardless of whether the company ultimately obtained the contract. The exception to this rule is if the costs are explicitly chargeable to the customer, regardless of whether the contract is obtained. In this case the asset would be a receivable rather than an asset amortized as an expense. • Costs that will be incurred - regardless of whether the contract is obtained – including costs that are incremental to trying to obtain a contract, such as bid costs that are incurred even if the entity does not obtain the contract – are expensed as they are incurred, unless they meet the criteria to be capitalized as fulfi llment costs. • Engineering and design work that is incurred prior to obtaining a contract are incurred whether the contract is obtained or not. So, they might qualify as precontract costs but not incremental cost to obtain.

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