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Understand ASC 606 commission capitalization with this complete guide, covering key concepts, compliance strategies, and practical steps for your business.
The way you account for sales commissions has fundamentally changed. Under the new rules, that commission you pay to a salesperson is no longer just a line-item expense for the month. It’s now considered an asset—an investment you made to secure a stream of future revenue. This shift is the core idea behind ASC 606 commission capitalization. It requires you to defer the cost of acquiring a contract and recognize it over time. This guide will walk you through this new perspective, explaining how to identify capitalizable costs, determine the correct amortization period, and manage the process without getting buried in manual work.
If you’ve heard the term ASC 606 floating around, you’re not alone. Think of it as the universal rulebook for how companies report the money they earn from customers. Introduced in 2014, this standard aims to make revenue reporting consistent and comparable across all industries. It’s not just about when you recognize revenue, but also how you account for the costs of acquiring that revenue—specifically, sales commissions.
Under ASC 606, certain sales commissions are no longer treated as a simple expense that you write off immediately. Instead, they are viewed as an asset—a cost you incurred to obtain a contract that will provide value over time. This process is called commission capitalization. It’s a significant shift in accounting, but it gives a more accurate picture of your company's financial health by matching expenses to the revenue they help generate. Let's break down what this means for your business.
At its core, ASC 606 provides a clear framework for recognizing revenue. This framework is built on a five-step model that guides you through the entire process, from identifying the contract to recognizing the revenue when performance obligations are met. Understanding these steps is the foundation for applying the standard correctly.
The five steps are:
Here’s where things get interesting for your sales team’s compensation. ASC 606 changes how you account for sales commissions by treating them as "incremental costs of obtaining a contract." In simple terms, an incremental cost is an expense you wouldn't have paid if you hadn't won that specific customer contract. Think of a direct commission paid to a salesperson for closing a deal.
Because these costs are directly tied to future revenue, you don't expense them right away. Instead, you record them on your balance sheet as an asset. These capitalized commissions are then amortized, or spread out as an expense, over the period that the goods or services are transferred to the customer—often the life of the contract.
This approach marks a major departure from older accounting rules. Previously, most companies would record sales commissions as an expense in the period they were paid. It was a straightforward, one-and-done entry. This often resulted in a mismatch between when the expense was recorded and when the related revenue was recognized, which could distort your profitability in a given period.
ASC 606 corrects this by aligning the cost of the commission with the revenue it helped generate. By treating incremental commissions as a capitalizable asset that is expensed over the contract's life, the standard ensures your financial statements more accurately reflect the economic reality of your customer contracts. This gives you and potential investors a clearer view of your long-term profitability.
The key to capitalizing commissions under ASC 606 lies in one word: incremental. The standard says you can only capitalize the "incremental costs of obtaining a contract." In simple terms, this means you can only defer costs that you wouldn't have incurred if you hadn't won that specific contract. If the cost exists whether you sign one deal or one hundred, it’s not incremental. This distinction is the foundation for correctly applying the rule, so let's break down exactly which costs make the cut and which ones don't. Getting this right is crucial for accurate financial reporting and staying compliant.
The most straightforward example of an incremental cost is a sales commission. When you pay a sales representative a specific amount or percentage for closing a deal, that payment is a direct result of obtaining the contract. Without that contract, there would be no commission. This is the classic cost that ASC 606 was designed to address. Under the standard, these types of sales commissions are viewed as an asset because they are directly tied to future revenue from the customer contract. This allows you to align the expense with the revenue it helped generate, giving you a more accurate picture of profitability over the life of the contract.
Just as important as knowing what qualifies is knowing what doesn't. The most common non-incremental cost is a fixed salary. You pay your sales team their base salaries regardless of whether they close a specific deal this month. Since the expense isn't tied to a single contract win, it can't be capitalized. The same logic applies to marketing campaign costs, legal fees for drafting a standard contract template, or the cost of responding to a Request for Proposal (RFP). While these expenses are related to sales, they are considered general costs of doing business, not direct costs of obtaining one particular contract. You must expense these costs as they are incurred.
Commission structures are rarely simple, but ASC 606 can handle the complexity. What if your commission rates change based on volume? For example, a rep might earn 5% on their first ten deals and 7% on every deal after that. These variable or tiered commissions are still considered incremental costs. Why? Because each commission payment is still a direct result of securing a specific contract. The changing rate doesn't alter the fundamental link between the cost and the contract. You simply capitalize the specific commission amount paid for each individual contract, even if the percentage rate varies from one to the next.
Let's clear up a few common points of confusion. A general annual bonus paid to a sales manager based on the team's overall performance or total company profit is typically not an incremental cost. It's usually tied to multiple factors, not just the acquisition of one specific contract. Another misconception is about the nature of the cost itself. Remember, the goal of capitalization is to treat the commission as an asset that you amortize over time. According to guidance from firms like PwC, this aligns the cost of acquiring the contract with the revenue you'll recognize from it, providing a more accurate financial picture.
Once you know which costs qualify, the next step is to apply the ASC 606 framework correctly. This involves more than just identifying the right numbers; you also have to think about timeframes, grouping strategies, and practical ways to make the process less of a headache. Getting these details right is crucial for compliance and ensures your financial statements accurately reflect your company's performance over the life of your customer contracts.
Think of it as building a clear, repeatable process. You’ll need to pinpoint the exact costs to capitalize, decide how long to spread them out, and choose an accounting approach that fits your business model. Luckily, the standard includes a few shortcuts you can use to simplify things. Let’s walk through the key requirements you need to meet.
First, you need to confirm which costs are truly capitalizable. The rule of thumb is to capitalize commissions only if they are "incremental" to winning a contract. In simple terms, incremental costs are the expenses you wouldn't have incurred if you hadn't closed that specific deal. The most obvious example is a sales commission paid directly for securing a new customer. If the contract falls through, you don't pay the commission. This direct link makes it an incremental cost. These sales commissions are then treated as an asset on your balance sheet instead of being expensed immediately, which better reflects the value they bring over time.
After you’ve capitalized a commission, you can't just leave it on the balance sheet. You have to amortize it, or spread the cost, over a specific period. Typically, this period matches the length of the customer contract. For a two-year contract, you’d amortize the commission over two years. Things get more complex with renewals, especially if the commission rates for renewals are different from the initial contract. You need to consider the entire anticipated customer lifecycle, not just the initial term. This is a critical step in the commission expense process that ensures your expenses align with the revenue you’re recognizing from that customer.
You don’t always have to analyze every single contract one by one. ASC 606 allows you to use a portfolio approach, where you group similar contracts and apply the same capitalization and amortization logic to the entire batch. This can be a huge time-saver, especially for businesses with high volumes of standardized contracts. For this to be a valid approach, the contracts in the portfolio must have similar characteristics, and you must expect that the financial outcome of accounting for the portfolio isn't materially different from accounting for each contract individually. It’s a strategic choice that balances precision with efficiency.
The Financial Accounting Standards Board (FASB) recognized that these rules could be burdensome, so they included a few practical expedients to simplify compliance. The most useful one allows you to expense a commission immediately if the amortization period would be one year or less. This lets you bypass the capitalization and amortization process for short-term contracts, saving you significant time and effort. Another helpful shortcut is using an "average customer term" to estimate the amortization period across a portfolio of contracts, which can be a reasonable and defensible approach for many businesses.
Once you’ve identified which sales commissions qualify as incremental costs, the next step is to correctly account for them. This involves capitalizing the cost as an asset and then amortizing it over time. Following a clear, step-by-step process ensures your financial statements are accurate and compliant with ASC 606. It might sound complicated, but breaking it down makes it much more manageable. Let's walk through the four key steps to properly capitalize and amortize your sales commissions.
First, you need to record the commission cost correctly. Instead of immediately expensing the full commission payment when it’s paid, you’ll record it as an asset on your balance sheet. Think of it as an investment you made to acquire a contract and its future revenue stream. This asset represents the future economic benefit your company will receive from that specific sales effort. This approach gives a more accurate picture of your company’s profitability over time, matching the costs of acquiring a contract with the revenue that contract generates.
After you’ve capitalized the commission as an asset, you need to expense it gradually. This process is called amortization. The core principle is to spread the cost over the period that the asset is expected to generate value. For sales commissions, this is typically the initial contract term. For example, if a two-year contract was secured with a $10,000 commission, you would expense that cost over those two years. The goal is to align the expense recognition with the revenue recognized from the contract the commission helped obtain.
Determining the amortization period gets more complex when you consider the full customer relationship, including potential renewals. If you expect a customer to renew their contract, you may need to amortize the initial commission over a longer period than just the first term. This is especially true if renewal commissions are significantly lower or non-existent, as the initial commission is tied to acquiring the entire stream of revenue from that customer. You need to assess your customer data and history to make a reasonable estimate of the customer's expected life. You can find more insights on handling these kinds of scenarios on our blog.
Capitalizing commissions isn’t a one-time action; it requires ongoing attention. You must periodically test the capitalized asset for impairment. This means checking if the asset's value on your books is still recoverable. For instance, if a customer cancels their contract unexpectedly, the future revenue you expected from that contract is lost. In that case, the remaining unamortized commission asset is "impaired," and you must write it off as an expense in the current period. Regularly testing for impairment ensures your balance sheet doesn't overstate the value of your assets. Managing these details is where an automated solution can prevent costly errors and save significant time.
Sales commission plans are rarely simple. They often include tiers, renewal bonuses, and other variables tied to contract terms. ASC 606 provides guidance for these scenarios, but it requires careful attention to detail. Getting it right ensures your financial statements accurately reflect acquisition costs, no matter how intricate your commission structure is. Here’s how to handle the most common complexities.
Many businesses use tiered commissions to motivate sales teams—for instance, paying 5% on the first ten sales and 8% thereafter. Under ASC 606, these variable rates are still incremental costs that must be capitalized because they result directly from securing the contract. The key is having a system that accurately tracks these changing rates and applies them correctly for capitalization. This ensures you account for every detail as performance milestones are met.
Your approach to renewal commissions depends on whether they are “commensurate with” the initial commission. If a renewal commission is similar to the initial one, you amortize the initial cost over the first contract term only. However, if the renewal commission is much lower or nonexistent, you must amortize the initial cost over a longer period that includes expected renewals. This approach reflects the full customer lifecycle you gain from the initial sales effort.
When a contract includes multiple deliverables, like a software license plus a support package, you must allocate the capitalized commission costs across each item. ASC 606 requires this allocation to be proportional to the standalone selling price of each performance obligation. This process ensures costs are matched to revenue as each part of the customer promise is fulfilled. Properly splitting the total price is fundamental to compliance.
As your business evolves, so will your commission plans. Your accounting processes must be flexible enough to adapt to these shifts without causing compliance issues. Manual tracking in spreadsheets can quickly become messy and error-prone when plans change. An automated system handles this complexity, letting you update rules while ensuring your accounting stays accurate. This flexibility is essential for mastering commission expenses in a dynamic business environment.
Putting ASC 606 commission rules into practice can feel like a major project, but you can manage it by breaking it down into clear, actionable steps. Addressing potential hurdles head-on will help you build a compliant process that stands up to scrutiny and supports your business as it grows. Let's walk through the most common challenges and how you can solve them.
First, take a hard look at your current tools. Your existing financial systems might need significant changes to properly track, assign, and spread out commission costs according to the new standard. Many legacy ERP and accounting platforms weren't built to handle the detailed tracking that ASC 606 requires for capitalizing and amortizing assets over a contract's life. Before you try to force a square peg into a round hole, assess your systems. Can they connect contract data with commission payouts and amortization schedules? If not, it’s time to explore solutions that offer seamless integrations with your CRM and accounting software to automate this complex process.
If your team is still relying on spreadsheets to track commissions, you're creating unnecessary risk. Manual data entry is prone to errors, lacks a clear audit trail, and makes compliance a constant headache. To build a reliable system, you need to move away from manual methods and adopt a strong, centralized tracking system. Using sales commission automation software is key. It automatically calculates commissions, creates clear records, and connects with your other financial systems. This not only ensures accuracy but also provides a single source of truth for all your commission data, giving you deeper insights into your sales performance and financial health.
Technology is a powerful ally, but it works best when supported by solid internal processes. To ensure compliance, you need to make sure your procedures for managing contracts, collecting data, and recognizing revenue are strong and reliable. This means defining who is responsible for each step, from verifying contract terms to approving commission payouts. Document these workflows and make them accessible to your team. When everyone understands their role and follows a consistent process, you reduce the risk of errors and create a culture of accountability. Strong controls are the foundation of a trustworthy financial reporting system.
When auditors come knocking, they’ll want to see your work. Simply having the right numbers isn't enough; you need to show how you got them. This is why thorough documentation is non-negotiable. Keep detailed records of your commission calculations and the logic behind your decisions. Your documentation should explain how you identify incremental costs, determine amortization periods, and handle different commission structures. This not only makes audits much easier but also serves as a valuable guide for your team, ensuring consistency even if personnel changes. It’s a testament to the diligence and expertise of the team at HubiFi.
Don’t wait for an audit notice to find out if your process has flaws. The best approach is to be proactive. Regularly review your commission calculations and paperwork to catch and fix any problems early. Think of it as performing a mini-audit on yourself. This practice helps you refine your methods, reinforce your team's training, and demonstrate a commitment to compliance. By catching discrepancies on your own terms, you can correct them without the pressure of an external review. If you want an expert eye on your process, you can always schedule a demo to see how an automated solution can keep you audit-ready at all times.
Trying to manage ASC 606 commission capitalization with spreadsheets is a recipe for headaches. It’s a manual, time-consuming process that’s incredibly prone to human error. A single misplaced decimal or broken formula can throw off your financials, creating serious problems during an audit. This is where technology steps in to save the day—and your sanity. By adopting an automated solution, you can move away from risky manual tracking and toward a streamlined, accurate, and auditable system.
Automated revenue recognition platforms are designed specifically to handle the complexities of ASC 606. They take the guesswork out of capitalization and amortization, ensuring your calculations are correct and your records are clean every single time. This isn't just about making your finance team's life easier; it's about building a foundation of trustworthy data that gives you confidence in your financial statements. With the right technology, you can automate commission tracking, integrate your financial systems, monitor compliance continuously, and generate reports that offer powerful insights into your business.
The first step in simplifying compliance is to take commission calculations out of spreadsheets. Specialized software can automatically calculate commissions based on your specific plans, whether they’re simple, tiered, or variable. This automation ensures that every commission is correctly attributed to the corresponding contract and recognized over the appropriate period. Using a dedicated tool drastically reduces the risk of errors that can occur with manual data entry. It also creates a clear, auditable trail of all calculations, providing a transparent record of how you arrived at your capitalized asset values. This makes it much easier to master commission expenses and prove compliance.
Your commission data doesn’t exist in a vacuum. It originates in your CRM and ultimately impacts your general ledger in your ERP or accounting software. An automated solution that doesn’t connect with your other systems just creates another data silo. The key is to find a platform that offers seamless integrations with your existing tech stack. This creates a smooth flow of information, pulling contract and sales data from your CRM and pushing accurate journal entries to your ERP. This connectivity eliminates redundant data entry, ensures consistency across platforms, and establishes a single source of truth for all your commission-related data.
ASC 606 compliance isn't a one-and-done task; it requires ongoing attention. The right technology gives you the tools to monitor your capitalized commissions continuously. Instead of waiting for a quarterly review to catch a problem, you can use real-time dashboards to track amortization schedules, perform impairment tests, and see the impact of any changes to your commission plans as they happen. This proactive approach allows you to identify and address potential issues before they become significant problems. It transforms compliance from a reactive, stressful exercise into a manageable, ongoing process you can control. Seeing how this works in practice can make all the difference, which is why a personalized demo is often the best next step.
While the primary goal is compliance, a powerful automation tool does more than just check the boxes for ASC 606. It turns your commission data into a source of valuable business intelligence. With just a few clicks, you can generate detailed reports that show you trends in commission costs, the profitability of different contracts, and the performance of your sales team. These reports provide finance and sales leaders with the data they need to make smarter, more strategic decisions. You can analyze the effectiveness of your commission plans, forecast future expenses with greater accuracy, and gain a deeper understanding of the financial drivers of your business.
Getting your commission capitalization right isn't a one-time task. It requires a solid, repeatable system that can adapt as your business grows. Building a sustainable compliance framework means creating clear rules, training your team, and using the right tools to manage risk. This approach turns compliance from a recurring headache into a streamlined process, making audits smoother and your financial data more reliable. A strong framework ensures you stay compliant with ASC 606 consistently, not just when you’re playing catch-up.
Your first step is to create and document clear internal policies. You need to have clear guidelines for how you spread out capitalized commissions. This means deciding on a consistent amortization method and sticking to it. The amortization period should logically match either the initial contract term or the expected customer relationship length, including anticipated renewals. Documenting these decisions is crucial—it creates a rulebook for your team to follow and provides essential support during an audit. This clarity removes guesswork and ensures everyone handles commission expenses the same way every time.
A policy is only as good as the people implementing it. Make sure your team understands ASC 606 rules and how your company applies them. This doesn't have to be a week-long seminar; it can be a straightforward training session supported by clear documentation they can reference later. It’s also vital to keep good records of your commission calculations and procedures. When your team is confident about the process, they make fewer errors. Effective training empowers your finance and sales ops teams to maintain compliance and accurately handle even the most complex commission scenarios.
Business rarely stands still, and your accounting practices need to be flexible enough to keep up. Commission structures often change, and many companies, especially those with subscription models, have complicated contracts with variable terms. These complexities introduce risk. Manually tracking commissions across spreadsheets can quickly lead to errors and non-compliance. An automated system that can handle different commission types and contract changes is your best defense. It helps you adapt quickly and reduces the risk of costly mistakes, ensuring your financial reporting remains accurate. You can schedule a demo to see how automation can help manage these risks.
Transparency is a core principle of ASC 606. Your company must clearly explain its accounting methods in its financial statement footnotes. This means telling the story behind the numbers. You need to disclose which costs you chose to capitalize and why, the method used to amortize those costs, and the balances of capitalized assets. Providing this level of detail shows investors, auditors, and other stakeholders that you have a firm grasp on your revenue recognition. Clear disclosures build confidence and demonstrate a commitment to accurate financial reporting, which you can read more about on our HubiFi blog.
Why can't I just keep expensing commissions as I pay them? Think of it this way: the commission you paid is directly tied to revenue you'll earn over the entire life of a customer contract. Expensing it all at once creates a mismatch, making your company look less profitable in the month you paid the commission and artificially more profitable later. ASC 606 corrects this by treating the commission as an asset that you expense gradually, which gives a much more accurate and stable picture of your company's financial health over time.
What happens if a customer cancels their contract before the commission is fully amortized? This is a great practical question. If a customer leaves early, the future revenue you expected from them is gone. That means the capitalized commission asset on your books has lost its value. You must then write off the remaining unamortized balance as an expense in the period the contract was canceled. This process is called an impairment test, and it ensures your balance sheet accurately reflects the current value of your assets.
Do I have to track every single contract individually? That sounds like a nightmare. You don't, which is a huge relief for many businesses. The standard allows for a "portfolio approach," where you can group similar contracts together and apply the same capitalization and amortization rules to the entire batch. For this to work, the contracts in the group must share similar characteristics, and the financial result can't be significantly different from tracking them one by one. It’s a practical shortcut that saves a ton of time without sacrificing compliance.
Are my sales manager's bonuses or my marketing costs capitalizable too? Generally, no. The rule focuses on "incremental" costs—expenses you would not have paid if you hadn't won that specific contract. A sales manager's bonus is often tied to overall team performance, not one deal, and marketing costs are incurred to generate leads, not to close a single contract. Since these costs aren't directly tied to one specific contract win, they are treated as general business expenses and are not capitalized.
My commission plan changes based on performance. How does that affect capitalization? Complex commission plans are common, and ASC 606 can handle them. Even if your commission rates are tiered or variable, they are still considered incremental costs because each payout is a direct result of securing a contract. You simply capitalize the specific commission amount paid for each individual deal. The key is having a system that can accurately track these changing rates and apply them correctly, which is where an automated solution becomes essential.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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