Capitalized Cost from Contracts with Customers

12 Months Ended

Dec. 31, 2019

Capitalized Cost from Contracts with Customers

Capitalized Cost from Contracts with Customers

(A.3) Capitalized Cost from Contracts with Customers

y Costs of Obtaining Customer Contracts

Capitalized costs from customer contracts are classified as Other non-financial assets in our statement of financial position.

The capitalized assets for the incremental costs of obtaining a customer contract primarily consist of sales commissions earned by our sales force. Judgment is required in determining the amounts to be capitalized, particularly where the commissions are based on cumulative targets and where commissions relate to multiple performance obligations in one customer contract. We capitalize such cumulative target commissions for all customer contracts that count towards the cumulative target but only if nothing other than obtaining customer contracts can contribute to achieving the cumulative target. Commissions for contracts with multiple performance obligations or for probable renewals thereof are allocated to these performance obligations and probable renewals relative to the respective standalone selling price.

Typically, we either do not pay sales commissions for customer contract renewals or such commissions are not commensurate with the commissions paid for new contracts. Thus, the commissions paid for renewable new contracts also relate to expected renewals of these contracts. Consequently, we amortize sales commissions paid for new customer contracts on a straight-line basis over the expected contract life including probable contract renewals. Judgment is required in estimating these contract lives. In exercising this judgment, we consider our respective renewal history adjusted for indications that the renewal history is not fully indicative of future renewals. The amortization periods range from 18 months to 12 years depending on the type of offering. In 2019, the amortization period for commissions granted for on premise support contracts was adjusted from eight years to 12 years based on changes in our renewal history. Amortization of the capitalized costs of obtaining customer contracts is classified as sales and marketing expense.

We expense incremental costs of obtaining a customer contract as incurred if we expect an amortization period of one year or less.

y Costs to Fulfill Customer Contracts

Capitalized costs incurred to fulfill customer contracts mainly consist of direct costs for custom cloud development contracts as far as these costs are not in scope of other standards than IFRS 15. These costs are amortized after completion of the development on a straight-line basis over the expected life of the cloud subscription contract and including expected renewals. Judgment is required in evaluating whether costs are direct or indirect and in estimating contract lives. Derived from our respective history, the amortization period is typically six years.

Amortization of capitalized costs to fulfill contracts for custom cloud applications and extensions is included in the cost of cloud.

Capitalized Cost from Contracts with Customers

€ millions	2019			2018
	Current	Non-Current	Total	Current	Non-Current	Total
Capitalized cost of obtaining customer contracts	414	1,318	1,732	326	1,006	1,332
Capitalized cost to fulfill customer contracts	66	117	183	35	66	101
Capitalized contract cost	480	1,435	1,915	361	1,072	1,433
/ Other non-financial assets	1,188	1,701	2,889	889	1,301	2,191
Capitalized contract cost as % of / other non-financial assets	40	84	66	41	82	65

Amortization Expense

€ millions	2019	2018
Capitalized cost of obtaining customer contracts	367	231
Capitalized cost to fulfill customer contracts	81	50