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:
- 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
- Subtopic 985-20 on costs of software to be sold, leased, or otherwise marketed.
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:
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).
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.
The costs are expected to be recovered.
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.
25-7 Costs that relate directly to a contract (or a specific anticipated contract) include any of the following:
Direct labor (for example, salaries and wages of employees who provide the promised services directly to the customer)
Direct materials (for example, supplies used in providing the promised services to a customer)
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)
Costs that are explicitly chargeable to the customer under the contract
Other costs that are incurred only because an entity entered into the contract (for example, payments to subcontractors).
25-8 An entity shall recognize the following costs as expenses when incurred:
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)
Costs of wasted materials, labor, or other resources to fulfill the contract that were not reflected in the price of the contract
Costs that relate to satisfied performance obligations (or partially satisfied performance obligations) in the contract (that is, costs that relate to past performance)
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).
ASC 340-40-25-6 indicates that when costs incurred to fulfill a contract with a customer are within the scope of any other Codification topics or subtopics, such costs should be accounted for in accordance with those other topics or subtopics.
The entity may need to consider applying the impairment guidance in ASC 330 to similar goods held in inventory.