Costs to fulfil a contract: when they become an asset

Q: What does a worked example look like?

Illustration only. A cleaning company wins a three year contract worth £180,000 a year, £540,000 in total. Before starting it spends: CostAmountTreatment Staff time surveying the client's sites and setting up client specific rotas and systems£24,000Contract fulfilment asset under 23.117 Cleaning machines bought for the contract£9,000Property, plant and equipment under Section 17 Share of head office overheads£3,000Expense: general and administrative The company records Dr Contract fulfilment asset £24,000, Cr Bank or accruals £24,000. The cleaning service is delivered evenly, so each year it charges Dr Cost of sales £8,000, Cr Contract fulfilment asset £8,000. At the end of year one the asset stands at £16,000. Early in year two the client renegotiates. The remaining consideration falls to £300,000 and the company expects remaining direct costs of £290,000. The recoverable amount under 23.122 is £10,000, so an impairment loss of £6,000 is recognised and the remaining £10,000 is amortised over the rest of the term.

Under the revised Section 23 of FRS 102, a cost of fulfilling a contract becomes an asset only if no other section of the standard deals with it and it passes three tests: it relates directly to an identified or specifically anticipated contract, it creates or enhances resources that will be used to satisfy performance obligations in the future, and it is expected to be recovered. The asset is then amortised as the related goods or services pass to the customer and tested for impairment under Section 27, using a recoverable amount based on the contract itself.

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Where do fulfilment costs sit in the new Section 23?

The Periodic Review 2024 amendments replaced the old revenue section with a five step model and apply to accounting periods beginning on or after 1 January 2026 (paragraph 1.37(b)). For the overall model see our guide to the five step revenue model. The new section includes a block of paragraphs on contract costs, 23.113 to 23.123, which splits them into two kinds:

Costs to obtain a contract, such as a sales commission. Paragraph 23.113 says an entity may recognise these as an asset, so capitalisation is a policy choice. They are covered in our page on costs to obtain a contract.
Costs to fulfil a contract, the subject of this page. Paragraph 23.117 says an entity shall recognise these as an asset if the conditions are met. There is no policy choice, and the one year practical expedient in paragraph 23.114 is written only for costs to obtain a contract, so it cannot be used to expense qualifying fulfilment costs.

Does another section of FRS 102 deal with the cost first?

Paragraph 23.116 sends fulfilment costs to the relevant section of the standard before Section 23 is considered at all, naming Section 13 Inventories, Section 17 Property, Plant and Equipment and Section 18 Intangible Assets other than Goodwill as examples. Machinery bought to service a contract is property, plant and equipment and is depreciated under Section 17. Materials held for use on the contract are inventory. Only costs that fall outside every other section reach the three tests in paragraph 23.117.

The costs left over are usually staff time and third party charges spent preparing to deliver a service: transferring a client’s data onto the supplier’s systems, designing processes for a particular client, mobilising a site team before an outsourcing or facilities contract starts. These are the “set up costs” and “pre contract costs” that paragraph 23.138(a) names as categories of contract cost asset.

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Which costs pass the three tests?

Paragraph 23.117 requires all three of the following:

The costs relate directly to a contract, or to an anticipated contract that the entity can specifically identify.
The costs generate or enhance resources of the entity that will be used in satisfying, or continuing to satisfy, performance obligations in the future.
The costs are expected to be recovered.

Paragraph 23.118 adds the dividing line in time: costs that relate to performance obligations already satisfied, or partly satisfied, are expenses when incurred because they relate to past performance. Once the service has started, the day to day cost of delivering it is an expense, not an asset.

FRS 102 does not list which costs relate directly to a contract. IFRS 15, on which the new Section 23 is based (Basis for Conclusions B23.1), gives a list in paragraph 97 that is a useful guide: direct labour, direct materials, allocations of costs such as contract management, supervision, insurance and depreciation of tools used on the contract, costs explicitly chargeable to the customer, and other costs incurred only because the contract was entered into, such as subcontractor payments. IFRS 15 paragraph 98 lists costs that are always expenses: general and administrative costs (unless explicitly chargeable to the customer), wasted materials, labour or other resources not reflected in the contract price, costs relating to past performance, and costs that cannot be split between satisfied and unsatisfied obligations.

How do set up activities fit with revenue?

Paragraph 23.20 says activities that do not transfer a good or service to the customer, such as set up activities and administrative tasks, are disregarded when identifying performance obligations. So the set up work earns no revenue of its own. Its cost is assessed under paragraph 23.117, and any fee the customer pays for it is usually an advance payment for the later service, as explained in our page on non refundable upfront fees. IFRS 15 paragraph B51 makes the related point that set up costs which do not satisfy a performance obligation are left out when measuring progress on a contract recognised over time, because they do not depict the transfer of services. This affects cost based input methods, described in our page on revenue over time.

How is the asset amortised?

After initial recognition the asset is carried at cost less accumulated amortisation and any accumulated impairment losses (paragraph 23.119). Paragraph 23.120 requires it to be amortised in line with the pattern of transfer to the customer of the goods or services to which the asset relates. For a service delivered evenly over a three year contract, that will usually mean straight line over three years.

Because the asset can relate to a specifically anticipated contract, the amortisation period may run beyond the current contract. IFRS 15 paragraph 99 says the asset may relate to goods or services under a specific anticipated contract, such as an expected renewal. If set up work will also serve a renewal that is genuinely expected, the period can reflect that; if not, it should stop at the end of the current term.

How is it tested for impairment?

Paragraph 23.121 applies Section 27 Impairment of Assets but replaces its normal recoverable amount rules (paragraphs 27.11 to 27.20A) with a contract specific test in paragraph 23.122. The recoverable amount is:

the remaining consideration the entity expects to receive for the related goods or services; less
the costs that relate directly to providing those goods or services and have not yet been expensed.

Paragraph 23.123 says the expected consideration is found using the transaction price principles, but without the constraint on variable consideration in paragraph 23.46, and adjusted for the customer’s credit risk. If the carrying amount exceeds this figure the excess is an impairment loss. Section 27 also governs reversal: paragraph 27.29 requires a reversal when the reasons for the loss no longer apply, and paragraph 27.30(c) caps it at the carrying amount the asset would have had without the impairment. For the wider rules see our guide to impairment under Section 27. Where the whole contract is loss making, a provision may also be needed, covered in our page on onerous contracts.

What does a worked example look like?

Illustration only. A cleaning company wins a three year contract worth £180,000 a year, £540,000 in total. Before starting it spends:

Cost	Amount	Treatment
Staff time surveying the client’s sites and setting up client specific rotas and systems	£24,000	Contract fulfilment asset under 23.117
Cleaning machines bought for the contract	£9,000	Property, plant and equipment under Section 17
Share of head office overheads	£3,000	Expense: general and administrative

The company records Dr Contract fulfilment asset £24,000, Cr Bank or accruals £24,000. The cleaning service is delivered evenly, so each year it charges Dr Cost of sales £8,000, Cr Contract fulfilment asset £8,000. At the end of year one the asset stands at £16,000.

Early in year two the client renegotiates. The remaining consideration falls to £300,000 and the company expects remaining direct costs of £290,000. The recoverable amount under 23.122 is £10,000, so an impairment loss of £6,000 is recognised and the remaining £10,000 is amortised over the rest of the term.

What must be disclosed, and how is it taxed?

Paragraph 23.138 requires the closing balances of assets from costs to obtain or fulfil contracts, by main category such as pre contract costs and set up costs, and the amortisation and impairment losses for the period. A small entity applying Section 1A gives a narrower set of revenue disclosures; paragraph 1AC.32B points it to paragraphs 23.135(a) to (c) on performance obligations.

For corporation tax, section 46 of the Corporation Tax Act 2009 requires trading profits to be calculated in accordance with generally accepted accounting practice, subject to adjustments required or authorised by law. A fulfilment asset therefore normally defers the deduction until it is amortised, while section 53 still denies a deduction for items of a capital nature, so the machines in the example qualify for capital allowances rather than depreciation. Our page on capital and revenue expenditure covers that boundary. A change of accounting policy on adopting the new Section 23 is a change of basis under section 180, and section 181 brings the adjustment into account on the first day of the first period on the new basis.

What mistakes come up most often?

Treating capitalisation as optional. Unlike costs to obtain a contract, qualifying fulfilment costs must be recognised as an asset.
Capitalising bid team time and general overheads. These are not directly related fulfilment costs.
Capitalising costs incurred after delivery has started that relate to work already done (paragraph 23.118).
Skipping paragraph 23.116 and putting equipment or inventory into the contract cost asset.
Testing impairment with value in use rather than the paragraph 23.122 formula.
On transition under paragraph 1.61(a), forgetting that paragraph 1.62(b) applies the new section only to contracts not completed at the date of initial application.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.