Capitalising sales commissions under IFRS 15 and ASC 340-40: What your commission system has to calculate

Most commission systems answer one question: how much do we pay this salesperson this month? Your auditor asks a different one: which of those payments are an asset, and over what period should that asset be expensed?

Under IFRS 15 and its US counterpart, ASC 340-40, a commission paid to win a multi-year contract is usually not an expense of the month in which it is paid. It is a cost of obtaining a contract, recognised as an asset and amortised over the period in which the customer receives the service. If the commission system only produces payouts, finance rebuilds that schedule in spreadsheets every quarter, and the spreadsheet becomes the place where audit questions start.

This article sets out the rules, works through the cases that generate most of the questions (renewals, clawbacks, tiers and payroll taxes) and lists the data a commission system has to hold so that the numbers can be produced and audited. References are to IFRS 15 as adopted in the EU and to the US Accounting Standards Codification; where the two differ, we say so.

The rule in five points

1. Recognition. “An entity shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs” (IFRS 15.91). ASC 340-40-25-1 sets the same requirement.
2. What counts as incremental. Costs “that it would not have incurred if the contract had not been obtained (for example, a sales commission)” (IFRS 15.92). Costs you would incur whether or not you win the contract are expensed, unless they are explicitly chargeable to the customer (IFRS 15.93).
3. The one-year practical expedient. You may expense the commission when incurred “if the amortisation period of the asset that the entity otherwise would have recognised is one year or less” (IFRS 15.94; ASC 340-40-25-4). It is a policy choice applied consistently to contracts with similar characteristics (IFRS 15.3), not a contract-by-contract decision, and a portfolio approach is allowed where the result would not differ materially (IFRS 15.4).
4. Amortisation. The asset is amortised “on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates”, which can include goods or services under a specific anticipated contract (IFRS 15.99; ASC 340-40-35-1). A significant change in the expected timing is a change in accounting estimate (IFRS 15.100).
5. Impairment. You recognise a loss when the carrying amount exceeds the remaining consideration you expect to receive, less the directly related costs of providing those goods or services that have not yet been expensed (IFRS 15.101–104).

A worked example

The figures below are an illustration.

A telecom operator signs a 24-month business contract worth €1,200 a month, €28,800 in total. The salesperson earns a 5% commission, €1,440, paid when the contract is signed. The employer also pays payroll taxes on the commission; assume 18%, or €259.20.

Both amounts exist only because the contract was signed, so both are capitalised and the contract cost asset is €1,699.20. The service is delivered evenly over 24 months, so straight-line amortisation fits: €70.80 a month.

Expensing the commission at once would put €1,699.20 into the month of signing. For a sales team that signs 500 such contracts a month, that is the difference between about €850,000 of expense in the first month and €35,400 a month for each monthly cohort of contracts over its 24 months. The total is the same; the shape of the profit and loss account is not. Because the amortisation period is longer than a year, the practical expedient is not available here, and the capitalised version is the one IFRS 15 requires.

Renewals: when the amortisation period is longer than the contract

The amortisation period follows the service the commission relates to, and that can include renewals you expect. The question auditors ask is whether the commission paid on a renewal is commensurate with the one paid on the initial contract.

• Deloitte treats a renewal commission as commensurate when both commissions are “reasonably proportional to the respective contract value”: 5% on the initial contract and 5% on each renewal is commensurate; 6% initially and 2% on renewal is not. The effort needed to win a renewal is not the test (Deloitte Roadmap, 13.4).
• If the renewal commission is commensurate, the initial commission is amortised over the initial contract term.
• If it is not, the initial commission also pays for expected renewals and the period is longer. Deloitte says it “might be, but should not be presumed to be, the entire customer life”; PwC refers to the “average customer life or a shorter period”.

Example (illustration). A SaaS customer signs a one-year contract worth €10,000. The salesperson earns 6% on the first year, €600, and 2% on each renewal. The renewal commission is not commensurate, so the €600 is amortised over the expected customer relationship. If your churn data supports an expected life of four years, that is €12.50 a month for 48 months rather than €50 a month for 12.

The same example hides a common trap. A one-year contract looks like an obvious candidate for the one-year practical expedient, but the expedient depends on the amortisation period, not on the contract term. Here the period is four years, so the €600 cannot be expensed at signing. Under a plan that paid 2% on both the initial year and each renewal, it could be.

The expected customer life needs evidence: churn history by product and customer segment, reviewed at least once a year. When the estimate changes, the remaining balance is amortised over the new period from that point on (IFRS 15.100).

Clawbacks, employment conditions, managers and payroll taxes

Clawbacks. A commission the salesperson must repay if the customer cancels early is still capitalised when the contract is signed. If circumstances change later, you reassess whether a valid contract still exists and test the asset for impairment (TRG Agenda Paper 23, paragraph 31).

Commissions that require the salesperson to stay. If part of a commission is paid only if the salesperson is still employed at a later date, PwC’s US guidance treats that part as pay for future service, expensed over the service period rather than capitalised (PwC Viewpoint, 11.2, example RR 11-5). If the deferred part is owed even if the salesperson leaves, it remains a cost of obtaining the contract and is capitalised (TRG Agenda Paper 57, example 3). IFRS reporters should confirm the treatment of service conditions with their auditor.

Managers. The standard does not distinguish commissions by job title. If the salesperson earns 10%, the sales manager 5% and the regional manager 3% of a new contract, all three amounts are incremental (Deloitte Roadmap, 13.2). A bonus based on annual sales targets, overall profitability or individual performance reviews is not incremental to any specific contract and is expensed (ASC 340-40-55-3; IFRS 15, illustrative example IE190).

Payroll taxes and benefits. Costs incurred as a direct result of the commission, such as payroll taxes or pension contributions on it, are capitalised with it; allocations of costs you would incur anyway are not, and there is no policy choice. This comes from a staff paper discussed by the joint FASB–IASB Transition Resource Group rather than a position adopted by its members (Agenda Paper 23, issue 6), and Deloitte’s guidance agrees with it.

Tiers, accelerators and changes in estimate

Many plans pay nothing below a threshold and more above it: for example 0% up to €1 million of quarterly bookings, 2% between €1 million and €2 million and 5% above, or a higher rate applied retroactively to every contract once a target is reached. These commissions are still incremental, because they would not have been paid without the contracts (TRG Agenda Paper 57, example 5; Agenda Paper 23, issue 5).

Two methods of recognising them are accepted (Deloitte Roadmap, 13.2):

• capitalise when the contract that crosses the threshold is signed; or
• capitalise as each contract is signed, based on the estimated total commission for the period.

Deloitte adds that entities “should consider their historical policies for recording commission liabilities”. Whichever method you choose, apply it consistently, and make sure the system can attribute a tier payment to the contracts that earned it, because each part is amortised over its own contract’s period.

Changes in estimate. If churn rises and the expected customer life falls from four years to three, the remaining balance is amortised over the shorter period from that point on (IFRS 15.100).

Impairment. If prices fall so far that the remaining consideration no longer covers the asset plus the related costs not yet expensed, the difference is an impairment loss (IFRS 15.101). IFRS allows a later reversal, capped at the carrying amount the asset would have had without the impairment (IFRS 15.104). US GAAP does not allow the reversal (ASC 340-40-35-6), so a group reporting under both frameworks needs the system to keep the two histories apart.

The data your commission system has to hold

What you have to disclose

Under IFRS 15 you disclose the judgements made in determining the costs and the amortisation method (paragraph 127); the closing balances of assets recognised from costs to obtain contracts, by main category, and the amortisation and impairment losses for the period (paragraph 128); and the fact that you use the practical expedient (paragraph 129). US GAAP has the same requirements in ASC 340-40-50-2 to 50-6, with relief for entities that are not public business entities. If the system cannot produce these figures, they will come from a spreadsheet, and the spreadsheet is what the auditor will test.

A checklist before your next audit

1. List every component of every commission plan and classify it as incremental, conditional on continued employment or discretionary.
2. Compare initial and renewal rates in each plan to decide which commissions are commensurate.
3. Document where you use the one-year practical expedient, by portfolio.
4. Record payroll taxes and benefits on commissions at the same level of detail as the commissions themselves.
5. Agree the method for tiered commissions with your auditor and apply it consistently.
6. Make sure the system produces the amortisation schedule and the disclosure figures without manual adjustments.

Commission and billing systems account for 19 of the 145 projects in Pretius’s documented portfolio. The payout rules are what users see; the accounting data around them is what auditors test. If you are replacing or automating a commission system, start from the table above and from the plans you actually pay, and see how we approach sales process automation, including MonkeyJar for commission management, or our earlier article on automating commission calculations. If you would like to go through your plans with us, book a discovery call.

This article describes IFRS 15, ASC 340-40 and their published interpretations as of October 2026. It is not accounting advice: agree your accounting policies with your auditor.

Sources

• IFRS 15 as adopted in the EU: Commission Regulation (EU) 2016/1905, paragraphs 3–4, 91–104 and 127–129
• Deloitte, Roadmap: Revenue Recognition: 13.2 Costs of obtaining a contract, 13.4 Amortization and impairment, 15.4 Disclosure of contract costs, Appendix C.12
• PwC Viewpoint: 11.2 Incremental costs of obtaining a contract, 11.4 Amortization and impairment
• FASB–IASB Transition Resource Group: Agenda Paper 23, Costs to obtain a contract (January 2015); Agenda Paper 57 (November 2016) as summarised by PwC: capitalisation and amortisation and November 2016 meeting