costs to fulfill a contract

ASC 340-10 is the Overall subtopic for Other Assets and Deferred Costs, applicable to all entities. Its substantive guidance is limited to (1) describing prepaid expenses — amounts paid in advance (insurance, interest, rents, taxes, unused royalties, prepaid advertising service, operating supplies) that are used up within the normal operating cycle and classified as current assets — and (2) the recognition rules for preproduction design and development costs incurred under long-term supply arrangements. Costs deferred under other regimes (loan origination costs, internal-use software, environmental costs, broker-dealer and industry costs) are addressed by other Topics cross-referenced in Section 60.

ASC 340-20 formerly governed capitalized advertising costs (including direct-response advertising) — when such costs could be recorded as assets, how they were measured, amortized, tested for realizability, presented, and disclosed. Every paragraph in the subtopic (Sections 05, 15, 25, 30, 35, 45, 50, 55, and 60) has been superseded by Accounting Standards Update No. 2014-09 (Revenue from Contracts with Customers). The subtopic therefore contains no operative guidance; advertising costs are now expensed as incurred (or the first time the advertising takes place) under ASC 720-35, and contract-related costs are addressed by ASC 340-40.

ASC 340-30 tells you how to apply the deposit method of accounting to insurance and reinsurance contracts that fail to transfer insurance risk (which requires transfer of both timing risk and underwriting risk). At inception a deposit asset or liability is recognized at consideration paid or received less explicitly identified premiums or fees retained (340-30-25-1; 340-30-30-1). Subsequent measurement depends on which of four risk categories the contract falls into: effective-yield/interest-method accretion for timing-risk-only or no-risk contracts, unexpired-coverage plus present value of expected recoveries for underwriting-risk-only contracts, and the open-year method for indeterminate-risk contracts.

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.

ASC 340-910 was the construction-contractor branch of the "Other Assets and Deferred Costs" topic, addressing precontract and other deferred costs incurred by construction contractors. Every substantive paragraph (05-1, 15-1, and 50-1) was superseded by ASU 2014-09 (the revenue recognition standard), so the subtopic is now an empty shell with no operative guidance. Costs to obtain and fulfill a contract with a customer are now accounted for under ASC 340-40.

ASC 340-915 formerly provided guidance on other assets and deferred costs for development stage entities, but every paragraph in the subtopic (Sections 05, 15, 25, and 35) was superseded by Accounting Standards Update No. 2014-10. As a result, there is no longer any incremental GAAP for deferred costs that is specific to development stage entities; such entities apply the same recognition and measurement guidance as any other reporting entity.

ASC 340-928 governs when a music entity may capitalize advance royalties paid to artists, the cost of record masters, and minimum guarantees paid in advance by licensees. Capitalization hinges on recoverability: an advance royalty or the record company's share of record master cost is an asset only if the artist's past performance and current popularity provide a sound basis for estimating recovery from future royalties or sales. Capitalized amounts are charged to expense as royalties are earned or amortized over the recorded performance's life in relation to expected net revenue, with immediate write-off of nonrecoverable portions.

ASC 340-940 governs two broker-dealer asset/deferred-cost items: exchange memberships and deferred underwriting expenses. Memberships are classified based on the rights conveyed — as an intangible asset (trading right only), an ownership interest in the exchange (cost less impairment), or a contributed interest (fair value with an equal, offsetting subordinated liability). Underwriting expenses incurred before securities are issued are deferred and recognized when the related underwriting revenues are recorded, or written off if the deal does not close.

ASC 340-944 governs how insurance entities account for and report certain deferred costs and prepaid expenses, organized into a General Subsection and a Reinsurance Contracts Subsection. Its operative rule is that amounts an insurer pays a reinsurer for the unexpired portion of reinsured contracts — prepaid reinsurance premiums — must be reported separately as assets (340-944-25-1), rather than netted against related liabilities.

This Subtopic governs the accounting for the cost of issuing certain Government National Mortgage Association (GNMA) securities by mortgage banking entities. Issuers electing the internal reserve method must capitalize the one month's interest cost required to be paid to a trustee (340-948-25-1), subject to a ceiling equal to the present value of net future servicing income (340-948-30-1). The capitalized amount is then amortized in proportion to, and over the period of, estimated net servicing income (340-948-35-1).

ASC 340-952 formerly contained the franchisor-specific guidance on deferred costs (for example, direct and indirect costs of franchise sales). Every paragraph in the subtopic — Sections 05, 15, and 25 — was superseded by ASU 2014-09 (Revenue from Contracts with Customers). Franchisors now account for costs of obtaining and fulfilling franchise contracts under ASC 340-40 and recognize franchise revenue under ASC 606 (including the industry guidance in ASC 952-606).

This Subtopic covers "other assets and deferred costs" of health care entities — prepaid expenses, deposits, and deferred expenses, including amounts paid to physicians for future services such as administering a hospital department or providing community services that further the entity's mission (340-954-05-2). If such prepaid costs are deferred, they must be amortized over the period benefited (340-954-35-2), and all such items are classified as current or noncurrent as appropriate (340-954-45-1). The former recognition guidance (Sections 25 and part of 35) was superseded by ASU 2014-09, so contract cost questions now fall under ASC 340-40 and revenue under ASC 606.

ASC 340-970 (the Real Estate Project Costs Subsections) governs when costs of real estate projects may be capitalized, how they are subsequently measured and amortized, and when they must be written off. Preacquisition costs are capitalized only if directly identifiable with a specific property, capitalizable if the property were owned, and acquisition is probable; option payments are always capitalized. Once a project is substantially completed and held available for occupancy, carrying and rental operating costs are expensed, depreciation begins, and capitalized rental costs are amortized.

This Subtopic governs deferred cost recognition for real estate time-sharing activities. The default rule is that all costs incurred to sell time-sharing intervals are expensed as incurred unless they qualify for capitalization as incremental costs of obtaining a contract under 340-40-25-1 through 25-4. Seller financing costs (e.g., loan origination costs) follow Subtopic 310-20, and incremental costs to rent units during holding periods are deferred and then expensed (or netted against inventory) when the rental occurs.

This subtopic governs when a rate-regulated entity may capitalize incurred costs as regulatory assets (deferred costs) and, in particular, how to account for phase-in plans — rate-making arrangements that defer part of the rate increase caused by placing a newly completed plant in service in order to avoid a "rate spike." A cost is capitalized only if it is probable that future revenue at least equal to the cost will result from including it in allowable costs and that revenue is intended to recover the previously incurred cost rather than fund similar future costs (980-340-25-1). Amounts deferred under a phase-in plan may be capitalized only for plants completed or substantially constructed before January 1, 1988, and only if the plan meets four strict criteria (980-340-25-3).

ASC 705-976 addresses the measurement of costs related to retail land sales, using the same scope as the Real Estate—Retail Land Overall Subtopic (976-10-15). Its substantive initial measurement guidance was superseded by ASU 2014-09, so the Subtopic now simply directs preparers to Subtopic 340-40 for incremental costs of obtaining a contract with a customer and costs to fulfill a contract.

ASC 720-952 was the franchisor-specific guidance on other expenses (franchise costs such as direct and indirect costs of franchise sales and continuing franchise services). Every paragraph in the subtopic has been superseded — the recognition, presentation and other guidance by Maintenance Update 2017-09 and the disclosure paragraph by ASU 2014-09 (Revenue from Contracts with Customers). As a result, the subtopic contains no operative guidance today; franchisor cost accounting is addressed under ASC 606 and ASC 340-40.

This Subtopic tells federal government contractors when interest cost may (and may not) be capitalized. Because assets built under contracts where revenue is recognized over time are "employed in the earnings activities" of the contractor (and often involve routinely produced inventories), interest capitalization is prohibited for those long-term contracts. Only when revenue is recognized at a point in time and fulfillment costs are capitalized as an asset under Subtopic 340-40 can those costs be qualifying assets for interest capitalization, and then the investment is limited to uncollected receivables net of related non-interest-bearing liabilities.