ASC 606

ASC 606 is the US accounting standard covering revenue from contracts with customers, developed jointly with the IASB so that it and the international standard IFRS 15 would broadly agree. Its subject is revenue: which period a sale belongs in and at what amount. Sales compensation is not mentioned anywhere in it. Every comp manager ends up reading about it anyway because of a companion piece, ASC 340-40, issued out of the same project and dealing with the costs of obtaining and fulfilling a contract. Commission is one of those costs. Pages that say 606 when the rule they are describing is 340-40 are common enough that naming the right one is a useful signal about who wrote the page.

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. This guidance governs when that cost appears on the income statement. The cash moves once. The expense arrives in slices.

Incremental is the load-bearing word, and it carries most of the judgement. A cost qualifies only where the company would not have incurred it had the contract not been won. A commission paid because one specific deal closed is the textbook case. A sales manager's salary is paid whether deals close or fail, so it is not an incremental cost of obtaining anything and carries on being expensed as it arises. Payments tied to something other than winning the contract, such as a team target or a discretionary award, usually fall outside as well. Which is why the difference between a commission and a bonus stops being cosmetic the moment an auditor reads the plan document.

A qualifying commission is capitalised: it lands on the balance sheet as an asset instead of going straight to the income statement. From there it is amortised on a systematic basis consistent with the transfer of the goods or services the asset relates to, which in practice means picking a period of benefit and spreading the cost evenly across it, month by month, until nothing is left. The rep saw none of this. One payment left payroll on one day, under a plan that never mentioned any of it.

There is a practical expedient for the small stuff. Where amortising the capitalised cost would take a year or less, a company may simply recognise it as an expense when it is incurred. Monthly subscriptions, one-off transactions and short engagements often qualify, and a business selling nothing longer than a year may find it has very little to capitalise at all. Two details catch people out. The expedient is a policy election, so it has to be chosen, written down and applied consistently rather than reached for whenever capitalising looks like effort. And the test runs on the amortisation period, which can be longer than the contract, so a book of twelve-month deals does not qualify automatically.

The period of benefit is where the standard stops being arithmetic. It is frequently longer than the contract term, because a commission paid on the initial sale is understood to have bought the renewals that follow whenever the renewal pays a much smaller commission or none at all. Companies in that position amortise over expected customer life, estimated from their own retention history and defended when asked. Commish is a commission engine and has no business being an accounting firm. The period, the estimate, the expedient and the policy are calls for your finance team and your auditor. What a comp system can usefully hand them is a complete record of what was paid, on which contract, under which rule, with the workings attached.