Worked example
A $24,000 commission capitalized on a 36-month contract, with amortization starting in month 7 of the fiscal year.
| Input | Value |
|---|---|
| Capitalized commission amount | $24,000.00 |
| Amortization period (months) | 36 |
| Start month in fiscal year 1 (1–12) | 7 |
| Is the renewal commission commensurate with the initial one? | Yes |
| Result | Value |
|---|---|
| Expense recognized in fiscal year 1 | $4,000.00 |
| Monthly amortization expense | $666.67 |
| Expense in fiscal year 2 | $8,000.00 |
| Expense in fiscal year 3 and later | $12,000.00 |
| Remaining asset at end of fiscal year 1 | $20,000.00 |
- Monthly expense: amount ÷ months: $666.67
- Months in fiscal year 1: 13 − start month (capped at the period): 6 mo
- Fiscal year 1 expense: $4,000.00
- Fiscal year 2 expense: $8,000.00
- Fiscal year 3 and later: $12,000.00
- Asset remaining at end of FY1: amount − FY1 expense: $20,000.00
What ASC 340-40 asks for
ASC 606 governs revenue; the cost side sits in ASC 340-40. Costs that an entity would not have incurred if the contract had not been obtained, such as a commission paid on signature, are incremental costs of obtaining a contract. When the entity expects to recover them, they are recognized as an asset and amortized on a systematic basis consistent with the transfer of the related goods or services.
A practical expedient allows those costs to be expensed when incurred if the amortization period would be one year or less. Salaries and costs incurred whether or not the contract is won are not incremental.
How the schedule is built
Monthly expense = capitalized amount ÷ amortization months
Months in FY1 = 13 − start month (capped at the period)
FYn expense = cumulative amount through FYn − cumulative amount through FYn−1
Cumulative amounts are rounded to the cent before taking differences, so the fiscal years always add up exactly to the capitalized amount. The remaining asset at the end of FY1 is the amount not yet expensed.
Choosing the amortization period
The period should reflect the goods or services the commission relates to. If renewals earn a commission commensurate with the initial one, the initial commission is commonly amortized over the initial contract. If not, the period often extends to cover anticipated renewals. The renewal question in the form only adjusts the guidance; you decide the months.
Not accounting advice. Policies, impairment testing and disclosures should be confirmed with your auditors. To model the commission itself, start with the SaaS commission calculator or the commission calculator.
Frequently asked questions
Does every commission have to be capitalized?
Only incremental costs of obtaining a contract that the entity expects to recover. Commissions with an amortization period of one year or less may be expensed as incurred under the practical expedient, if the entity elects it.
Why straight-line?
It is the simplest systematic pattern and a common one when services transfer evenly over the contract. If your services transfer unevenly, the pattern of amortization should follow that transfer instead.
What happens if the customer churns early?
The remaining asset may need to be assessed for impairment or written off. This calculator assumes the contract runs its full period.