Investor Presentaiton
HKAS 1.51(a)
HKAS 1.49
HK Listco Ltd
Financial statements for the year ended 31 December 2023
HKFRS 15.128(a),
(b)
HKFRS 15.94, 129
HKAS 1.61
(c) Contract costs
Contract costs capitalised as at 31 December 2023 relate to the incremental sales commissions paid to
property agents whose selling activities resulted in customers entering into sale and purchase
agreements for the group's properties which are still under construction at the reporting date 204.
Contract costs are recognised as part of "distribution costs" 205 in the statement of profit or loss in the
period in which revenue from the related property sales is recognised. The amount of capitalised costs
recognised in profit or loss during the year was $1,052,000 (2022: $755,000). There was no impairment
in relation to the opening balance of capitalised costs or the costs capitalised during the year (2022: Nil).
The group applies the practical expedient in paragraph 94 of HKFRS 15 and recognises the incremental
costs of obtaining contracts relating to the sale of completed properties and services as an expense
when incurred if the amortisation period of the assets that the group otherwise would have recognised
is within the same reporting period as the date of entering into the contract.206
The amount of capitalised contract costs that is expected to be recovered after more than one year is
$527,000 (2022: $378,000). All of the other capitalised contract costs are expected to be recovered
within one year 202
HKFRS 15.128(a).
HKAS 1.15 & 99
HKFRS 15.129
204 HKFRS 15 requires analysis of the closing balances of capitalised contract costs by main category of cost (e.g. costs to obtain
contracts with customers, pre-contract costs and setup cost). In this illustration, HK Listco only has capitalised contract costs in
relation to the sales commission paid to the property agents.
205 Paragraph 99 of HKFRS 15 requires capitalised contract costs to be charged to profit or loss on a systematic basis that is consistent with
the transfer to the customer of the goods or services to which the asset relates. HKFRS 15 describes this systematic charging as
"amortisation". However, in practice, when the capitalised cost relates to a good or service for which revenue is recognised at a single
point in time, such as in HK Listco's example of a sales commission on a property sale, the contract cost will be recognised in profit or
loss at the same point in time as the property revenue, rather than being spread over a period. Given this, users of the financial
statements may find it confusing to see this charge described as "amortisation" and it would be advisable to use other terms which
they are more familiar with, such as "charge" or "expense".
206
Similarly, judgement is required in determining where to classify the expense in the statement of profit or loss. The appropriate
classification will generally depend on the nature of the entity and the industry in which it operates. In this illustration, HK Listco
presents its expenses by function (see footnote 49) and includes sales commissions in profit or loss as "distribution costs" because this
is the function of these expenses, irrespective of whether they are being capitalised and recognised later when related revenue is
recognised or expensed as incurred. If an entity chooses to present its expenses by nature (e.g. depreciation and amortisation,
purchase of materials, transport costs, employee benefits, etc), then judgement will be required to determine the nature of the
expenses arising from the systematic recognition in profit and loss of capitalised contract costs.
In all cases, an entity is subject to the general requirement to ensure that its presentation is not misleading and is relevant to an
understanding of its financial statements.
Under the disclosure requirement of paragraph 129 of HKFRS 15, if an entity has taken advantage of the practical expedient in
relation to capitalisation of costs of obtaining contracts, it needs to disclose this fact.
As discussed in footnote 101, in this illustration HK Listco does not take full advantage of the practical expedient as HK Listco only
applies the practical expedient to costs of obtaining contracts that would be fully amortised in the period they arise if they had been
capitalised. HK Listco's disclosure is therefore tailored to suit its facts and circumstances.
If an entity takes full advantage of the practical expedient and therefore only capitalises the costs of obtaining contracts with
amortisation period longer than one year, the following example wording could be used to satisfy the disclosure requirement of
paragraph 129 of HKFRS 15:
"The group applies the practical expedient in paragraph 94 of HKFRS 15 and recognises the incremental costs of obtaining contracts
as an expense when incurred if the amortisation period of the asset that the group otherwise would have recognised is one year or
less from the initial recognition of the asset."
130
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