Long term contract assets and liabilties

I find this information in Schweser notes book with no more explanation/example Neither the curriculum.
“A final notable change to the standards for accounting for a long-term contract is that the costs to secure the contract and certain other costs must be capitalized; that is, they are put on the balance sheet as an asset. The effect of capitalizing these expenses is to decrease reported expenses on the income statement, increasing reported profitability during the contract period.”
Anyone can explain with an example the contract assets/ liabilities and its impact on profitability?

I suggest you to have a look at these first:

What does it mean to "capitalize expenses"?


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Suppose that you are bidding on a job to build an office building in Chicago, and in the course of the contractor selection process you pay a $1,000,000 bribe to the selection committee. Under the old accounting rules, you would expense that $1,000,000 in the first year (Bribery Expense on the income statement). Under the new rules, you have to capitalize it (Prepaid Bribes on the balance sheet) and amortize it over the life of the construction process.

Note that even under the new rules, if you don’t get the contract, then you expense the entire bribe this year.


Great examples. Thanks pyng

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Thanks s2000magician. Your explanation is great as always!

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My pleasure.

The example is on point. However, if bribe is the example it should be expensed as you do not expect to recover this cost from the contract as it illegal so you will be hiding it somewhere and not capitalise it :slight_smile:

IFRS states “An entity shall recognise as an asset the incremental costs of obtaining a
contract with a customer if the entity expects to recover those costs.”

Especially if the bribe is not a guarantee to obtain the contract then
IFRS states “Costs to obtain a contract that would have been incurred regardless of
whether the contract was obtained shall be recognised as an expense when

Apparently you missed the part about it being in Chicago.