How should costs related to selling, marketing, and legal fees in obtaining a contract be treated?

In the context of accounting for contract costs, it is essential to recognize that selling, marketing, and legal fees incurred to obtain a contract may provide future economic benefits. According to the principles outlined in relevant accounting standards, particularly IFRS 15 regarding revenue from contracts with customers, costs that are directly attributable to obtaining a contract can be capitalized.

When costs are capitalized, they are initially recorded as an asset on the balance sheet rather than being expensed immediately. This approach aligns with the matching principle, where expenses are recognized in the same period as the related revenue is recognized. By capitalizing these costs, it reflects the investment made in securing the contract and acknowledges that they will contribute to future revenue streams once the contract is fulfilled.

Once the contract is awarded and revenue begins to be recognized, these capitalized costs can then be amortized and recognized as expenses over the period of the contract. This treatment provides a clearer picture of financial performance over time and ensures that costs are appropriately matched with the revenue they help to generate.

Alternative treatments such as writing off costs immediately as expenses, recording them as liabilities, or ignoring them altogether do not align with the accounting framework that aims to capture the economic reality of contracts and their associated costs.