How should costs incurred in obtaining a contract be treated?

Costs incurred in obtaining a contract should be recognized as assets if recovery of those costs is expected. This treatment is aligned with the principle that costs should be capitalized when they provide future economic benefits. In the context of obtaining a contract, such costs—like sales commissions or legal fees relevant to the contract—will likely lead to future revenue generation, meeting the criteria for asset recognition. As long as there is a reasonable expectation that the costs will be recovered through future revenue, they should be recorded as an asset on the balance sheet.

This approach ensures that expenses are matched with the revenues they help to generate, following the matching principle in accounting. Therefore, these costs would be amortized over the life of the related contract, reflecting their consumption of economic benefit over time. This treatment supports a more accurate representation of a company's financial position and performance, emphasizing the importance of recognizing costs that can lead to income in the future.