Pre Contract Costs FRS 102: What You Need to Know
Pre contract costs are common in many industries and refer to the expenses incurred before a contract is finalized. These costs can include things like legal fees, research and development expenses, and advertising costs. In the UK, companies are required to follow Financial Reporting Standard 102 (FRS 102) when reporting their financial statements.
So, what exactly are pre contract costs in FRS 102? According to the standard, pre contract costs are defined as expenses incurred in connection with the negotiation or execution of a contract that is not yet certain to be entered into. This means that these costs are incurred before a contract is signed and are not refundable if the contract falls through.
Pre contract costs can be tricky to account for in financial statements, as they are not yet certain to be reimbursed by a customer or client. However, FRS 102 provides guidance on how to account for these costs to ensure accurate financial reporting.
Under FRS 102, pre contract costs should be capitalized and recognized as an asset on the balance sheet if they meet the following criteria:
1. It is probable that a contract will be obtained
2. The costs can be measured reliably
3. The costs are expected to be recoverable
Once these criteria are met, pre contract costs should be included in the cost of the related contract. If the contract is not obtained, the costs should be written off immediately.
It is important to note that pre contract costs are not the same as bid costs. Bid costs are expenses incurred in putting together a bid or proposal for a contract, and are not capitalized under FRS 102.
In conclusion, pre contract costs are a common occurrence in many industries, and FRS 102 provides guidance on how to accurately account for these expenses in financial statements. By understanding the criteria for capitalizing pre contract costs, companies can ensure accurate financial reporting and avoid potential issues with regulators.