ASC

ASC 340-40

Contracts with Customers

340 Other Assets and Deferred Costs

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In brief

IntermediateRecognitionSubsequent measurementImpairmentRevenue

ASC 340-40 governs capitalization, amortization, and impairment of two kinds of contract costs for contracts within the scope of Topic 606: incremental costs of obtaining a contract and costs to fulfill a contract that are not within the scope of another Topic. Incremental costs of obtaining a contract (e.g., sales commissions) are capitalized if the entity expects to recover them (340-40-25-1), while fulfillment costs are capitalized only if they relate directly to an identifiable (or specifically anticipated) contract, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered (340-40-25-5). Capitalized amounts are amortized consistently with transfer of the related goods or services and tested for impairment, with no reversal of impairment losses.

Key points (7)
  • An entity shall recognize as an asset the incremental costs of obtaining a contract—costs it would not have incurred had the contract not been obtained, such as a sales commission—if it expects to recover them (340-40-25-1 through 25-2); costs that would have been incurred regardless are expensed when incurred unless explicitly chargeable to the customer regardless of whether the contract is obtained (340-40-25-3).
  • Practical expedient: incremental costs of obtaining a contract may be expensed as incurred if the amortization period of the asset otherwise recognized would be one year or less (340-40-25-4), and use of the expedient must be disclosed (340-40-50-5).
  • Fulfillment costs are capitalized only if all three criteria in 340-40-25-5 are met (direct relation to an identified or specifically anticipated contract, generation or enhancement of resources used to satisfy future performance obligations, and expected recovery); costs within the scope of Topic 330, 340-10-25-1 through 25-4, Subtopic 350-40, Topic 360, or Subtopic 985-20 follow those Topics instead (340-40-25-6; 340-40-15-3).
  • General and administrative costs, wasted materials/labor not priced into the contract, costs relating to satisfied or partially satisfied performance obligations, and costs that cannot be distinguished between satisfied and unsatisfied obligations are expensed as incurred (340-40-25-8); costs that relate directly to a contract are listed in 340-40-25-7.
  • The capitalized asset is amortized on a systematic basis consistent with the transfer of the goods or services to which it relates, including goods or services under anticipated renewals (340-40-35-1; Example 2 amortizes a commission over seven years for a five-year contract with two expected renewals), and changes in expected timing are accounted for as a change in accounting estimate under Subtopic 250-10 (340-40-35-2).
  • An impairment loss is recognized to the extent carrying amount exceeds remaining expected consideration (determined using transaction price principles but ignoring the variable consideration constraint, adjusted for customer credit risk and including expected renewals/extensions) less the directly related costs not yet expensed (340-40-35-3 through 35-4); other-Topic assets are tested first and the remaining carrying amount is then included in the asset group or reporting unit under Topics 360 and 350 (340-40-35-5).
  • Reversal of a previously recognized impairment loss is prohibited (340-40-35-6); required disclosures include judgments made, amortization method, closing balances by main category of asset, and amortization and impairment amounts (340-40-50-2 through 50-3), which non-PBEs may elect not to provide (340-40-50-4).

For students. This is the cost-side companion to Topic 606 and a frequent exam trap: a sales commission tied to obtaining a specific contract is capitalized, but discretionary bonuses and legal/travel costs incurred whether or not the bid was won are expensed. Students also commonly amortize the asset over the stated contract term instead of the longer expected period including anticipated renewals, and forget that impairment losses can never be reversed.

incremental costs of obtaining a contractcosts to fulfill a contractsales commissionexpected recoveryamortization period including anticipated renewalscontract cost impairment testpractical expedient one year or lessanticipated contract

Machine-generated study aid for ASC 340-40. Check the source paragraphs below.

340-40-00Status

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340-40-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
ContractAddedAccounting Standards Update No. 2014-0905/28/2014
CustomerAddedAccounting Standards Update No. 2014-0905/28/2014
Not-for-Profit EntityAddedAccounting Standards Update No. 2014-0905/28/2014
Performance ObligationAddedAccounting Standards Update No. 2014-0905/28/2014
Public Business EntityAmendedMaintenance Update 2017-06 (PDF)04/07/2017
Public Business EntityAmendedMaintenance Update 2016-11 (PDF)06/27/2016
Public Business EntityAddedAccounting Standards Update No. 2014-0905/28/2014
RevenueAddedAccounting Standards Update No. 2014-0905/28/2014
Transaction PriceAddedAccounting Standards Update No. 2014-0905/28/2014
340-40-05-1AddedAccounting Standards Update No. 2014-0905/28/2014
340-40-05-2AddedAccounting Standards Update No. 2014-0905/28/2014
340-40-15-1 through 15-3
AddedAccounting Standards Update No. 2014-0905/28/2014
340-40-25-1 through 25-8
AddedAccounting Standards Update No. 2014-0905/28/2014
340-40-35-1 through 35-6
AddedAccounting Standards Update No. 2014-0905/28/2014
340-40-35-3 through 35-5
AmendedAccounting Standards Update No. 2016-2012/21/2016
340-40-50-1 through 50-6
AddedAccounting Standards Update No. 2014-0905/28/2014
340-40-50-3AmendedAccounting Standards Update No. 2024-0311/04/2024
340-40-55-1 through 55-9
AddedAccounting Standards Update No. 2014-0905/28/2014
340-40-60-1AddedAccounting Standards Update No. 2014-0905/28/2014
340-40-60-2AddedAccounting Standards Update No. 2014-0905/28/2014

340-40-05Overview and Background

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340-40-05-1
This Subtopic provides accounting guidance for the following costs related to a contract with a customer within the scope of Topic 606 on revenue from contracts with customers:
  1. a
    Incremental costs of obtaining a contract with a customer
  2. b
    Costs incurred in fulfilling a contract with a customer that are not in the scope of another Topic.
340-40-05-2
Paragraphs presented in bold type in this Subtopic state the main principles. All paragraphs have equal authority.

340-40-15Scope and Scope Exceptions

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Overall Guidance

340-40-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic (see Section 340-10-15), with specific qualifications and exceptions noted below.

Transactions

340-40-15-2
The guidance in this Subtopic applies to the incremental costs of obtaining a contract with a customer within the scope of Topic 606 on revenue from contracts with customers (excluding any consideration payable to a customer, see paragraphs
606-10-32-25 through 32-27
).
340-40-15-3
The guidance in this Subtopic applies to the costs incurred in fulfilling a contract with a customer within the scope of Topic 606 on revenue from contracts with customers, unless the costs are within the scope of another Topic or Subtopic, including, but not limited to, any of the following:
  1. a
    Topic 330 on inventory
  2. b
    Paragraphs
    340-10-25-1 through 25-4
    on preproduction costs related to long-term supply arrangements
  3. c
    Subtopic 350-40 on internal-use software
  4. d
    Topic 360 on property, plant, and equipment
  5. e
    Subtopic 985-20 on costs of software to be sold, leased, or otherwise marketed.

340-40-25Recognition

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Contract Costs

340-40-25-1
An entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs.
340-40-25-2
The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission).
340-40-25-3
Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained shall be recognized as an expense when incurred, unless those costs are explicitly chargeable to the customer regardless of whether the contract is obtained.
340-40-25-4
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.
340-40-25-5
An entity shall recognize an asset from the costs incurred to fulfill a contract only if those costs meet all of the following criteria:
  1. a
    The costs relate directly to a contract or to an anticipated contract that the entity can specifically identify (for example, costs relating to services to be provided under renewal of an existing contract or costs of designing an asset to be transferred under a specific contract that has not yet been approved).
  2. b
    The costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future.
  3. c
    The costs are expected to be recovered.
340-40-25-6
For costs incurred in fulfilling a contract with a customer that are within the scope of another Topic (for example, Topic 330 on inventory; paragraphs
340-10-25-1 through 25-4
on preproduction costs related to long-term supply arrangements; Subtopic 350-40 on internal-use software; Topic 360 on property, plant, and equipment; or Subtopic 985-20 on costs of software to be sold, leased, or otherwise marketed), an entity shall account for those costs in accordance with those other Topics or Subtopics.
340-40-25-7
Costs that relate directly to a contract (or a specific anticipated contract) include any of the following:
  1. a
    Direct labor (for example, salaries and wages of employees who provide the promised services directly to the customer)
  2. b
    Direct materials (for example, supplies used in providing the promised services to a customer)
  3. c
    Allocations of costs that relate directly to the contract or to contract activities (for example, costs of contract management and supervision, insurance, and depreciation of tools and equipment used in fulfilling the contract)
  4. d
    Costs that are explicitly chargeable to the customer under the contract
  5. e
    Other costs that are incurred only because an entity entered into the contract (for example, payments to subcontractors).
340-40-25-8
An entity shall recognize the following costs as expenses when incurred:
  1. a
    General and administrative costs (unless those costs are explicitly chargeable to the customer under the contract, in which case an entity shall evaluate those costs in accordance with paragraph 340-40-25-7)
  2. b
    Costs of wasted materials, labor, or other resources to fulfill the contract that were not reflected in the price of the contract
  3. c
    Costs that relate to satisfied performance obligations (or partially satisfied performance obligations) in the contract (that is, costs that relate to past performance)
  4. d
    Costs for which an entity cannot distinguish whether the costs relate to unsatisfied performance obligations or to satisfied performance obligations (or partially satisfied performance obligations).

340-40-35Subsequent Measurement

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Amortization and Impairment

340-40-35-1
An asset recognized in accordance with paragraph 340-40-25-1 or 340-40-25-5 shall be amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The asset may relate to goods or services to be transferred under a specific anticipated contract (as described in paragraph 340-40-25-5(a)).
340-40-35-2
An entity shall update the amortization to reflect a significant change in the entity's expected timing of transfer to the customer of the goods or services to which the asset relates. Such a change shall be accounted for as a change in accounting estimate in accordance with Subtopic 250-10 on accounting changes and error corrections.
340-40-35-3
An entity shall recognize an impairment loss in profit or loss to the extent that the carrying amount of an asset recognized in accordance with paragraph 340-40-25-1 or 340-40-25-5 exceeds:
  1. a
    The amount of consideration that the entity expects to receive in the future and that the entity has received but has not recognized as revenue, in exchange for the goods or services to which the asset relates (“the consideration”), less
  2. b
    The costs that relate directly to providing those goods or services and that have not been recognized as expenses (see paragraphs 340-40-25-2 and 340-40-25-7).
340-40-35-4
For the purposes of applying paragraph 340-40-35-3 to determine the consideration, an entity shall use the principles for determining the transaction price (except for the guidance in paragraphs
606-10-32-11 through 32-13
on constraining estimates of variable consideration) and adjust that amount to reflect the effects of the customer's credit risk. When determining the consideration for the purposes of paragraph 340-40-35-3, an entity also shall consider expected contract renewals and extensions (with the same customer).
340-40-35-5
Before an entity recognizes an impairment loss for an asset recognized in accordance with paragraph 340-40-25-1 or 340-40-25-5, the entity shall recognize any impairment loss for assets related to the contract that are recognized in accordance with another Topic other than Topic 340 on other assets and deferred costs, Topic 350 on goodwill and other intangible assets, or Topic 360 on property, plant, and equipment (for example, Topic 330 on inventory and Subtopic 985-20 on costs of software to be sold, leased, or otherwise marketed). After applying the impairment test in paragraph 340-40-35-3, an entity shall include the resulting carrying amount of the asset recognized in accordance with paragraph 340-40-25-1 or 340-40-25-5 in the carrying amount of the asset group or reporting unit to which it belongs for the purpose of applying the guidance in Topics 360 and 350.
340-40-35-6
An entity shall not recognize a reversal of an impairment loss previously recognized.

340-40-50Disclosure

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Assets Recognized from the Costs to Obtain or Fulfill a Contract with a Customer

340-40-50-1
Consistent with the overall disclosure objective in paragraph 606-10-50-1 and the guidance in paragraphs
606-10-50-2 through 50-3
, an entity shall provide the following disclosures of assets recognized from the costs to obtain or fulfill a contract with a customer in accordance with paragraphs 340-40-25-1 or 340-40-25-5.
340-40-50-2
An entity shall describe both of the following:
  1. a
    The judgments made in determining the amount of the costs incurred to obtain or fulfill a contract with a customer (in accordance with paragraph 340-40-25-1 or 340-40-25-5)
  2. b
    The method it uses to determine the amortization for each reporting period.
340-40-50-3
An entity shall disclose all of the following:
  1. a
    The closing balances of assets recognized from the costs incurred to obtain or fulfill a contract with a customer (in accordance with paragraph 340-40-25-1 or 340-40-25-5), by main category of asset (for example, costs to obtain contracts with customers, precontract costs, and setup costs)
  2. b
    The amount of amortization and any impairment losses recognized in the reporting period.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
220-40-65-1An entity shall disclose all of the following:
  1. a
    The closing balances of assets recognized from the costs incurred to obtain or fulfill a contract with a customer (in accordance with paragraph 340-40-25-1 or 340-40-25-5), by main category of asset (for example, costs to obtain contracts with customers, precontract costs, and setup costs)
  2. b
    The amount of amortization and any impairment losses recognized in the reporting period.
See paragraphs
220-40-50-21 through 50-25
for additional disclosure requirements.
340-40-50-4
An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission, may elect not to provide the disclosures in paragraphs
340-40-50-2 through 50-3
.

Practical Expedients

340-40-50-5
If an entity elects to use the practical expedient in paragraph 340-40-25-4 on the incremental costs of obtaining a contract, the entity shall disclose that fact.
340-40-50-6
An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission, may elect not to provide the disclosure in paragraph 340-40-50-5.

340-40-55Implementation Guidance and Illustrations

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Illustrations

340-40-55-1
Examples 1 and 2 illustrate the guidance in paragraphs
340-40-25-1 through 25-4
on incremental costs of obtaining a contract, paragraphs
340-40-25-5 through 25-8
on costs to fulfill a contract, and paragraphs
340-40-35-1 through 35-6
on amortization and impairment of contract costs.
340-40-55-2
An entity, a provider of consulting services, wins a competitive bid to provide consulting services to a new customer. The entity incurred the following costs to obtain the contract:
  • External legal fees for due diligence " $15,000 " Travel costs to deliver proposal " 25,000 " Commissions to sales employees " 10,000 " Total costs incurred " $50,000 "
340-40-55-3
In accordance with paragraph 340-40-25-1, the entity recognizes an asset for the $10,000 incremental costs of obtaining the contract arising from the commissions to sales employees because the entity expects to recover those costs through future fees for the consulting services. The entity also pays discretionary annual bonuses to sales supervisors based on annual sales targets, overall profitability of the entity, and individual performance evaluations. In accordance with paragraph 340-40-25-1, the entity does not recognize an asset for the bonuses paid to sales supervisors because the bonuses are not incremental to obtaining a contract. The amounts are discretionary and are based on other factors, including the profitability of the entity and the individuals' performance. The bonuses are not directly attributable to identifiable contracts.
340-40-55-4
The entity observes that the external legal fees and travel costs would have been incurred regardless of whether the contract was obtained. Therefore, in accordance with paragraph 340-40-25-3, those costs are recognized as expenses when incurred, unless they are within the scope of another Topic, in which case, the guidance in that Topic applies.
340-40-55-5
An entity enters into a service contract to manage a customer's information technology data center for five years. The contract is renewable for subsequent one-year periods. The average customer term is seven years. The entity pays an employee a $10,000 sales commission upon the customer signing the contract. Before providing the services, the entity designs and builds a technology platform for the entity's internal use that interfaces with the customer's systems. That platform is not transferred to the customer but will be used to deliver services to the customer.
340-40-55-6
In accordance with paragraph 340-40-25-1, the entity recognizes an asset for the $10,000 incremental costs of obtaining the contract for the sales commission because the entity expects to recover those costs through future fees for the services to be provided. The entity amortizes the asset over seven years in accordance with paragraph 340-40-35-1 because the asset relates to the services transferred to the customer during the contract term of five years and the entity anticipates that the contract will be renewed for two subsequent one-year periods.
340-40-55-7
The initial costs incurred to set up the technology platform are as follows:
  • Design services " $40,000 " Hardware " 120,000 " Software " 90,000 " Migration and testing of data center " 100,000 " Total costs " $350,000 "
340-40-55-8
The initial setup costs relate primarily to activities to fulfill the contract but do not transfer goods or services to the customer. The entity accounts for the initial setup costs as follows:
  1. a
    Hardware costs—accounted for in accordance with Topic 360 on property, plant, and equipment
  2. b
    Software costs—accounted for in accordance with Subtopic 350-40 on internal-use software
  3. c
    Costs of the design, migration, and testing of the data center—assessed in accordance with paragraph 340-40-25-5 to determine whether an asset can be recognized for the costs to fulfill the contract. Any resulting asset would be amortized on a systematic basis over the seven-year period (that is, the five-year contract term and two anticipated one-year renewal periods) that the entity expects to provide services related to the data center.
340-40-55-9
In addition to the initial costs to set up the technology platform, the entity also assigns two employees who are primarily responsible for providing the service to the customer. Although the costs for these two employees are incurred as part of providing the service to the customer, the entity concludes that the costs do not generate or enhance resources of the entity (see paragraph 340-40-25-5(b)). Therefore, the costs do not meet the criteria in paragraph 340-40-25-5 and cannot be recognized as an asset using this Topic. In accordance with paragraph 340-40-25-8, the entity recognizes the payroll expense for these two employees when incurred.

340-40-60Relationships

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Revenue from Contracts with Customers

340-40-60-1
For guidance on revenue from contracts with customers, see Topic 606.

Financial Services—Insurance

340-40-60-2
For guidance regarding direct response advertising costs, see Subtopic 944-30.

Related subtopics