What is the treatment of costs incurred in obtaining a contract if they are not expected to be recovered?

Costs incurred in obtaining a contract that are not expected to be recovered should be recorded as expenses. This is consistent with the recognition principle in accounting, which states that costs should be recognized in the period in which they are incurred if they do not provide future economic benefits. By expensing these costs, companies reflect the immediate financial impact of those costs on their profit and loss statement.

When costs are not expected to be recoverable, they do not meet the criteria for capitalization as assets, which usually requires that the costs provide future economic benefits and are expected to be recovered. Therefore, treating them as assets or deferring them as liabilities would not accurately represent the financial situation of the company. Additionally, capitalizing them as fixed assets is inappropriate because fixed assets generally need to have a longer-term usage and expected recoverable value associated with them.

Hence, recording these costs as expenses aligns with the principles of conservative accounting and ensures that financial statements provide a true and fair view of the company’s financial position.