ASC 606
ASC 606 is the US accounting standard for revenue from customer contracts, and the part that touches sales pay sits alongside it in ASC 340-40: commission that a company would not have paid had the deal been lost is capitalised as an asset and expensed gradually over the period the contract benefits.
Start with what the standard does not change, because it is the source of most of the confusion. A rep paid $18,000 for closing a contract still receives $18,000, on the same date, calculated by the same plan. ASC 606 governs when that cost appears on the income statement. The cash moves once. The expense arrives in slices.
The mechanics are narrower than they are usually described. Only incremental costs of obtaining a contract qualify, meaning costs the company would not have incurred if the contract had not been won. A commission paid solely because a deal closed is the standard example. A sales manager's salary, paid whether deals close or not, is not incremental and continues to be expensed as it is incurred. Bonuses that depend on things other than obtaining the contract usually fall outside too, which is why the distinction between a commission and a bonus stops being cosmetic once an auditor is in the room.
Capitalised commission is then amortised on a systematic basis consistent with the transfer of the goods or services the asset relates to. In practice that means picking a period of benefit and spreading the cost across it. There is a practical expedient for small stuff: where the amortisation period would be one year or less, the cost can simply be expensed when incurred. Monthly subscriptions and short contracts frequently qualify, and a company selling nothing longer than a year may have very little to capitalise at all.
One more thing worth knowing before a first audit. The period of benefit is often longer than the contract, because a commission paid on the initial sale is deemed to relate to the renewals that follow if the renewal commission is much smaller than the original. Companies in that position amortise over expected customer life instead of the contract term, and that estimate has to be documented and defended. Commish is a commission engine rather than an accounting firm: the period, the estimate and the policy are decisions for your finance team and your auditor.
A commission paid once, expensed across three years
A rep closes a 36-month contract in March and is paid $18,000 in that month's pay run. Finance concludes the period of benefit matches the contract term, so the cost is capitalised and amortised straight-line over 36 months.
- Commission paid to the rep, March
- $18,000
- Cash leaving payroll in March
- $18,000
- Amortisation period
- 36 months
- Expense recognised each month
- $500
- Expense recognised in the first twelve months
- $6,000
- Carried on the balance sheet after March
- $17,500
- March income statement charge, against March cash out
- $500 against $18,000
If the customer cancels in month ten, $5,000 has been amortised and $13,000 remains as a contract cost asset. That balance is tested for impairment and generally written down. Whether the rep keeps the $18,000 is a separate question, answered by the clawback clause rather than by the standard.
Assuming the amortisation period equals the contract term
It is the intuitive reading and it is frequently wrong. Where a company pays a large commission on the first sale and a much smaller one on renewal, the initial commission is understood to buy the renewals too, so the asset amortises over expected customer life. A three-year contract with a customer base that typically stays five years can mean a five-year amortisation, which lowers the annual charge and raises the balance sheet asset considerably. The number itself matters less than having written down how you arrived at it, because that reasoning is what an auditor will ask to see.
- Does ASC 606 change how much commission a salesperson is paid?
- No. ASC 606 and the related cost guidance in ASC 340-40 govern how a company accounts for commission, changing when the expense hits the income statement. The amount the rep earns, the date payroll delivers it, and the rules in the comp plan are all unaffected. It is a finance change that salespeople should never feel.
- What is the ASC 606 practical expedient for sales commissions?
- Where the amortisation period of the capitalised commission would be one year or less, a company may recognise the cost as an expense when it is incurred rather than capitalising and amortising it. Short contracts and month-to-month subscriptions often qualify. The expedient is a policy election and has to be applied consistently, so confirm the treatment with your auditor before relying on it.
Nearby terms
Knowing the word is
the easy half
Commish pays asc 606 the way your plan describes it, shows the arithmetic on every line, and traces each payment back to the deal that earned it.