ASC 606 / IFRS 15: Amortization of Sales Commission

A guide to understanding expense accounting for sales commissions following ASC 606 (Subtopic 340-40) / IFRS 15 requirements.



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Dmitri Kemenev
Dmitri Kemenev

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ASC 606 / IFRS 15: Amortization of Sales Commission

Organizations reporting financial statements under international financial reporting standards (IFRS) or generally accepted accounting principles (US GAAP) are required to follow specific accounting rules when it comes to expensing sales commissions.

In this article

  • What are the ASC 340-40 and IFRS 15 requirements?
  • How to determine whether to expense or capitalize sales commissions?
  • How to make corrections in commission accounting?

What are ASC 606, ASC 340-40, and IFRS 15 accounting standards?

ASC 606: Subtopic 340-40 and IFRS 15 are the accounting standards that outline how organizations are required to handle sales commissions in their financial reports. Specifically which accounting policy to apply in different circumstances.

ASC 606/ IFRS 15 were introduced jointly by The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in 2014 and became effective in 2018.

Excerpts from ASC 340-40 Standard

ASC 340-40-25-1: An entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs.

ASC 340-40-25-2: The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission).

ASC 340-40-25-3: Costs to obtain a contract that would have been incurred regardless of what the contract was obtained shall be recognized as an expense when incurred, unless those costs are explicitly chargeable to the customer regardless of whether the contract is obtained.

Choosing the right accounting policy for commissions

There are three ways sales commissions can be handled: 

  • expensed as incurred
  • expensed over the contract duration 
  • expensed over the useful life of the contract

The following diagram illustrates a simplified guidance on which accounting policy should be applied to sales commissions in different circumstances.

Examples of sales commission accounting

Expensed as incurred

Assume a Salesperson sells a one-off onboard package worth $12,000 and receives a $1,200 sales commission for that sale. As that sale is not renewable, the sale commission should be recognized as incurred. 

Note, an expense is incurred when the underlying service is performed, not when the sales commission is paid.

Therefore, if the onboarding service happened at the same time as the sale, the accounting report would look as follows.

If the onboarding service was completed 6 months after the sale, the commission expense would incur 6 months after the sale.

Expensed over the contract term

Now assume a Salesperson sells a 12 months software subscription renewal for $12,000 and receives $1,200 sales commission for that sale.

Expensed over the useful life of the contract

In a situation when a Salesperson sells a new subscription where sales commission (e.g. 10%) is greater than for sale of a renewal (e.g. 2%), the 10% sales commission must be recognized over a period of estimated useful life of the contract. Assuming useful life is equal to two years, the report would look like this.

The useful life is the estimated period over which the client benefits from the sale. It is determined internally and is commonly based on an average customer life, for example, three years.


In the situation where a correction is made several months after the original sale, the expense difference up to the current month is included in the month the correction takes place. 

For example, we initially thought that the sales commission was to be accounted as follows:

However, six months later, we realized that the commission was 2,400 (not 1,200). The correction would be applied as follows:

Contract Terminations

In the situation when a contract is terminated before the end of the useful life period, amortization should be accelerated.

How EqualTo can help with sales commission amortization

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Amortization of Sales Commissions Calculator – Free Excel Template

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