A guide to understanding expense accounting for sales commissions following ASC 606 (Subtopic 340-40) / IFRS 15 requirements.
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.
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.
There are three ways sales commissions can be handled:
The following diagram illustrates a simplified guidance on which accounting policy should be applied to sales commissions in different circumstances.
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.
Now assume a Salesperson sells a 12 months software subscription renewal for $12,000 and receives $1,200 sales commission for that sale.
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.
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:
In the situation when a contract is terminated before the end of the useful life period, amortization should be accelerated.
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