This guide summarizes public guidance for general information and is not accounting advice. Applying ASC 340-40 requires judgment on your facts; confirm your policy, amortization periods and disclosures with your auditors.
Apply it ASC 606 commission amortization calculator Straight-line amortization of capitalized commissions by fiscal year.Under ASC 340-40, a sales commission that would not have been paid without a specific customer contract is an incremental cost of obtaining that contract: if the company expects to recover it, it is capitalized as an asset and amortized as the related goods or services are delivered, unless the amortization period would be one year or less, in which case it may be expensed. The rules sit in ASC 340-40, issued alongside ASC 606, so most teams call this “ASC 606 commissions”. To turn a capitalized commission into a fiscal-year expense schedule, use the ASC 606 commission amortization calculator.
Which costs are incremental
ASC 340-40-25-1 and 25-2, as summarized in Deloitte’s Revenue Recognition Roadmap, require an asset for the incremental costs of obtaining a contract that the entity expects to recover, where incremental means a cost that would not have been incurred had the contract not been obtained. Costs that would have been incurred anyway are expensed when incurred unless they are explicitly chargeable to the customer (ASC 340-40-25-3).
How common commission features are generally treated in the Big-4 guidance:
| Payment | Generally incremental? | Basis |
|---|---|---|
| Commission as a % of a signed contract | Yes | Paid only because the contract was obtained (PwC 11.2) |
| Commission to the manager or regional leader on the same deal | Can be | Title or level is not the test (PwC) |
| Payroll taxes and benefits directly tied to a capitalized commission | Can be | If they would not exist without the contract (PwC; Deloitte) |
| Commission that also requires continued employment | No | Contingent on service, not only on the contract (PwC) |
| Bonus on overall performance (company results, MBOs) | No | Not tied to obtaining specific contracts (PwC) |
| Base salaries, marketing, proposal costs | No | Incurred whether or not a contract is signed |
Commissions paid in installments are a frequent question. FASB staff’s view is that when a commission is paid over time but depends only on the contract already obtained, the full amount is capitalized at contract inception (Question 67 of the FASB Revenue Recognition Implementation Q&As). A commission subject to clawback is also generally capitalized, with the asset tested for impairment if the customer later looks unlikely to perform (Question 68).
Amortization
The asset is amortized “on a systematic basis” consistent with the transfer of the goods or services it relates to (ASC 340-40-35-1, quoted in the Deloitte Roadmap). In practice:
- Period — the period over which the related goods or services transfer, which can include specifically anticipated contracts such as expected renewals, not only the initial contract term.
- Pattern — straight-line is common for subscription services delivered evenly; other patterns follow how the service is delivered.
- Updates — a significant change in the expected timing of transfer updates the amortization prospectively, as a change in accounting estimate (ASC 340-40-35-2).
- Impairment — an impairment loss is recognized when the carrying amount exceeds the remaining consideration expected, less the costs still to be incurred (ASC 340-40-35-3). Under US GAAP, reversal of an impairment is not permitted, per the Deloitte Roadmap.
For example, a company capitalizes a $24,000 commission on a contract whose services are expected to transfer evenly over 36 months, starting in the seventh month of its fiscal year. Monthly amortization is $24,000 ÷ 36 ≈ $666.67, so fiscal year one carries six months, or $4,000, and $20,000 remains on the balance sheet. The amortization calculator splits any amount by fiscal year.
The one-year practical expedient
ASC 340-40-25-4 lets an entity expense incremental costs as incurred when the amortization period of the asset would have been one year or less. Points the Big-4 guides stress:
- The test is the amortization period, not the contract term. A one-year contract whose commission relates to expected renewals can have an amortization period well over a year, so the expedient may not apply (PwC 11.2).
- No rounding. Deloitte’s Roadmap gives an example where a 13-month period does not qualify.
- Consistency. The expedient is applied consistently to contracts with similar characteristics, not chosen deal by deal (Deloitte; PwC).
Renewal commissions and the “commensurate” test
Renewal commissions are where most of the judgment sits, especially for SaaS plans that pay one rate on new business and another on renewals (the SaaS commission calculator models such plans).
The rule comes from the FASB’s basis for conclusions, quoted by FASB staff in Question 72: amortizing over a period longer than the initial contract is not appropriate when the renewal commission is commensurate with the initial one.
- Commensurate — FASB staff consider it generally reasonable to conclude that commissions reasonably proportional to contract value are commensurate (their example: 5% on both the initial and the renewal contract). The initial commission is then amortized over the initial contract term, and each renewal commission over its renewal period.
- Not commensurate — a disproportionate renewal commission (their example: 2% on renewal against 6% initially) generally is not. The initial commission then relates partly to anticipated renewals, and FASB staff describe two acceptable approaches (Question 71): amortize the initial commission over the expected customer relationship including specific anticipated renewals, or split it — the part matching the renewal commission over the initial term, the excess over the longer period.
- Level of effort is not the test. FASB staff reject the argument that a lower renewal rate is commensurate because renewals take less effort; the question is the period over which the related goods or services transfer.
- Renewal commissions themselves are capitalized when the renewal is obtained, because they are incremental to the renewal contract (Question 70).
Deloitte adds that the period may extend to the expected customer life when the facts support it, but a customer life should not be presumed.
What this means for RevOps and Finance
Plan design now has accounting consequences:
- Rate choices — the ratio between new-business and renewal rates drives the amortization period.
- Data — Finance needs deal-level commission data tagged by contract, start date and payee, every period.
- Changes — mid-year plan changes, clawbacks and contract modifications all flow into the asset.
A spreadsheet can carry these schedules while volumes are small; as contracts, payees and plan changes multiply, many teams rely on incentive compensation management software that produces capitalization and amortization schedules. Our ICM software comparison flags which platforms document ASC 340-40 support.
Key takeaways
- Incremental commissions you expect to recover are capitalized under ASC 340-40 and amortized as the related services transfer.
- The one-year expedient depends on the amortization period, including expected renewals, not on the contract term.
- Commensurate renewal commissions keep amortization to the initial term; non-commensurate ones extend it.
- Installment and clawback-subject commissions are generally capitalized up front, with impairment testing.
- These are judgment calls: document your policy and agree it with your auditors.
Frequently asked questions
Are sales commissions covered by ASC 606?
ASC 606 governs revenue. The treatment of commissions comes from ASC 340-40, Other Assets and Deferred Costs — Contracts with Customers, which was issued together with ASC 606 in the same standard update. People often say "ASC 606 commissions" for both.
Can we just expense all commissions?
Only where the practical expedient applies — when the amortization period of the asset would be one year or less — or where a cost is not incremental. Otherwise, incremental costs of obtaining a contract that the company expects to recover are capitalized.
Are commissions paid to sales managers capitalized?
They can be. PwC notes that the employee's title or level is not what determines whether a commission is incremental: if the payment would not have been made without the contract, it can qualify, whether it goes to the rep, the manager or a regional leader.