This free, guided checker walks your finance team through the key decision points for ASC 340-40 Costs to Obtain or Fulfill a Contract. Answer a few questions to see the likely treatment and the evidence to document.
Answer a few quick questions below. It is private - nothing is submitted or stored - and takes about a minute.
This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
ASC 340-40 addresses two distinct cost populations with different tests: incremental costs of obtaining a contract (ASC 340-40-25-1 through 25-3) and costs to fulfill a contract that no other Topic addresses (ASC 340-40-25-5). Classify the cost first. A common trap is analyzing software configuration or development spend under ASC 340-40 when ASC 350-40 governs it.
Costs within the scope of another Topic are accounted for under that Topic, not ASC 340-40 (ASC 340-40-25-5).
Official guidance: FASB Accounting Standards Codification
The test is strictly causal: only costs the entity would not have incurred had the contract not been obtained are incremental (ASC 340-40-25-2). Salaries, bid and proposal costs, and travel incurred win or lose do not qualify even though they relate to selling effort. Read the commission plan carefully - clawback, quota, and tiered accelerator features can change which amounts are truly incremental to a specific contract.
Use the interactive tool above to see how this applies to your situation.
Official guidance: FASB Accounting Standards Codification
ASC 340-40-25-3 requires costs to obtain that would be incurred win or lose to be expensed as incurred, unless they are explicitly chargeable to the customer regardless of whether the contract is obtained. The chargeable exception is narrow: it requires an enforceable right to reimbursement, not merely an expectation that contract pricing will eventually recover the spend.
Recognize an asset for costs to obtain that are explicitly chargeable to the customer regardless of outcome (ASC 340-40-25-3). Costs of obtaining a contract that would have been incurred regardless of outcome are expensed as incurred (ASC 340-40-25-3).
Official guidance: FASB Accounting Standards Codification
ASC 340-40-25-1 conditions capitalization on expected recovery. Recovery may come through the transaction price or through margin over the period the asset will be amortized, including specifically anticipated renewals. If the asset would fail the ASC 340-40-35-3 impairment test on day one - remaining expected consideration less direct fulfillment costs below the commission - expected recovery is absent and no asset is recognized.
Incremental costs the entity does not expect to recover are expensed as incurred (ASC 340-40-25-1).
Official guidance: FASB Accounting Standards Codification
The ASC 340-40-25-4 expedient looks to the amortization period of the asset, not the stated contract term. When renewals are anticipated and the renewal commission is not commensurate with the initial commission, the amortization period extends beyond the initial term - so the expedient can be unavailable even for a twelve-month contract. Commensurate is judged against the selling effort required for the renewal; a materially lower renewal commission rate usually is not commensurate.
The one-year practical expedient in ASC 340-40-25-4 is available; the entity may elect to expense the commission as incurred. Capitalize the incremental cost and amortize it over the initial contract term (ASC 340-40-25-1; ASC 340-40-35-1). Capitalize the incremental cost and amortize it over a period that includes specifically anticipated renewal periods (ASC 340-40-35-1).
Official guidance: FASB Accounting Standards Codification
The fulfillment cost criteria in ASC 340-40-25-5 apply only when the costs are not within the scope of another Topic. Test the other Topics first: costs to develop or configure software commonly fall under ASC 350-40, and costs to build delivery infrastructure fall under ASC 360. Skipping this gate is a frequent error that misclassifies fixed assets and software as contract cost assets.
Account for the costs under the other applicable Topic; the ASC 340-40 fulfillment cost criteria do not apply (ASC 340-40-25-5).
Official guidance: FASB Accounting Standards Codification
ASC 340-40-25-7 lists the costs that relate directly to a contract: direct labor, direct materials, directly attributable cost allocations such as contract management and supervision, costs explicitly chargeable to the customer, and other costs incurred only because of the contract, such as payments to subcontractors. An anticipated contract qualifies only when it is specifically identifiable - for example, setup work performed under a letter of intent for a renewal expected to be executed.
Costs that do not relate directly to a specific contract or specifically identifiable anticipated contract are expensed as incurred (ASC 340-40-25-8).
Official guidance: FASB Accounting Standards Codification
This criterion separates spend that builds a future-benefit resource from spend that is simply the cost of performing. ASC 340-40-25-8 requires expensing costs that relate to satisfied or partially satisfied performance obligations, abnormal amounts of wasted materials, labor, or other resources, and costs the entity cannot allocate between past and future performance. Costs of a satisfied performance obligation are never reinstated as an asset.
Costs of past performance, wasted resources, or effort that cannot be split between past and future performance are expensed as incurred (ASC 340-40-25-8).
Official guidance: FASB Accounting Standards Codification
Expected recovery is evaluated with the same economics as the impairment test in ASC 340-40-35-3: the remaining consideration the entity expects to receive - determined using transaction price principles without applying the variable consideration constraint and adjusted for the customer's credit risk (ASC 340-40-35-4) - less the costs that relate directly to providing the remaining goods or services. Recovery may reflect specifically anticipated renewal periods that the setup work will benefit.
All three criteria in ASC 340-40-25-5 are met; recognize a fulfillment cost asset and amortize it consistent with the transfer of the related goods or services. Fulfillment costs that are not expected to be recovered are expensed as incurred (ASC 340-40-25-5(c)).
Official guidance: FASB Accounting Standards Codification
Send us your situation and one of our senior CPAs will review it with you - fixed fee, no surprises.
Contact Us