ASC 606 and Deferred Sales Commissions: What You Need to Know

Commission accounting looks different than it used to now that ASC 606 is in effect. One of the biggest changes has to do with estimating and accounting for amortization.

In this article, we’ll briefly explain how amortization works, examine what sales commission accounting used to look like, consider the changes under ASC 606, and talk about how to remain ASC compliant while amortizing sales commissions.

How amortization works

Amortization is the act of spreading the costs of an intangible asset or loan over the duration of the lifetime of that asset or loan. For example, if an operating license costs $150 and lasts for three years, the amortization for the expense would be $50 per year.

Software, trademarks, licenses, copyrights, and patents are all examples of intangible assets for which companies need to report amortization expenses.

How ASC 606 changed sales commission accounting

ASC 606 introduced a few key changes to the accounting process for sales and commissions incentives. We’ll take a look at how it used to work and compare that to what it looks like under the new 5-step revenue recognition standards.

Sales commission accounting before ASC 606

Before ASC 606, businesses accounted for commissions as direct expenses. This meant that sales commissions, bonuses, and incentive pay for staff and contractors could all be calculated and directly expensed at the end of the year or reporting period. It was a fairly straightforward process that has now become a bit more complicated.

Key changes to calculating sales commission expenses

With the new revenue recognition standards in effect, companies must report intangible assets as forecasted estimates. Then throughout each period, they need to account for those estimates as they evolve based on performance and company spending.

Failure to comply may be perceived as earnings management or “cooking the books,” and the Securities and Exchange Commission (SEC) issues fines for this type of financial records manipulation—whether it was done intentionally or not. In some cases, businesses may even go under as a result of the punitive measures.

Note: Earnings management should not be confused with an On-Target Earnings Model, which is intended to help companies stay on track.

How to amortize sales commissions under ASC 606

Accountants will see two key changes to the way they calculate commissions and similar expenses.

1. They must amortize the commission paid on a sales order across a defined number of years.
2. They may need to make accounting adjustments in response to unanticipated customer churn events.

This also necessitates some changes to accounting journals. Monthly journal entries prior to ASC 606 were simple:

The new process requires an additional two steps each month. The following example assumes a 36-month amortization period.

1. Adjusting the journal to reflect ASC 606 recognition of the expense:

2. Scheduled journal to amortize the existing book of commission paid on opportunities:

How long to amortize sales commissions for SaaS and other subscription business models

There are two main schools of thought on the appropriate length of amortization periods for SaaS and other subscription models:

• Five to six-year amortization periods
• Three-year amortization periods

Companies that use longer amortization periods experience less-frequent disruptions in this portion of their accounting. But those that use shorter periods have a more accurate picture of true amortized assets. And due to the nature of SaaS, three years is often enough time for the product to have evolved into something completely new.

Reduce the risk of accounting errors with Performio

With the introduction of ASC 606, revenue recognition became more complex. Businesses must account for the amortization of sales commissions, rebates, and sales incentives, along with performance obligations and other qualitative elements in revenue recognition.

All these added complexities make it easier than ever to introduce human error into your calculations—especially if you’re relying on a sea of spreadsheets for sales compensation. But there’s an easier way.

Performio automates much of the sales commission calculation process, keeping you effortlessly ASC 606–compliant while easing the calculation of estimated commissions expenses, reducing the risk of accounting errors, and reducing the time it takes to fix errors.

Our enterprise-grade ICM was built by sales comp experts for sales comp professionals. For more than 15 years, we’ve helped hundreds of sales teams in dozens of industries, striking the perfect balance between flexibility and ease of use.

We love helping businesses reduce the pain of calculating and accounting for sales commissions, freeing them to spend more time growing and serving their customers.

Request a demo today, and see what Performio can do for your business.