ASC 340-40: how to capitalize sales commissions

ASC 340-40 is the US GAAP subtopic that tells you to record the incremental costs of obtaining a customer contract, most often sales commissions, as an asset instead of an expense. You then amortize that asset as you deliver the service the contract pays for, so a commission on a three-year contract is expensed over three years, not in the month it was paid.

Subtopic 340-40, Other Assets and Deferred Costs: Contracts with Customers, arrived in the same Accounting Standards Update 2014-09 as ASC 606, and it applies on the same dates. A company that recognizes revenue under the five steps of ASC 606 applies 340-40 to the cost of winning those contracts. This guide covers which costs qualify, the one-year shortcut, the amortization period and a worked example.

Which costs does ASC 340-40 capitalize

ASC 340-40 capitalizes a cost to obtain a contract only when it is incremental: a cost you "would not have incurred if the contract had not been obtained" (340-40-25-2). The standard's own example is a sales commission. You record it as an asset if you expect to recover it, which for a profitable contract you usually do (340-40-25-1).

Everything else you spend to win a deal is expensed when incurred, even when it was spent on that one customer. Paragraph 340-40-25-3 says costs that would have been incurred regardless of whether the contract was obtained are expenses, unless the customer is explicitly charged for them either way.

The FASB's Example 1 (340-40-55-2 to 55-4) settles the common cases. A consulting firm spends $15,000 on external legal fees for due diligence, $25,000 on travel to deliver a proposal and $10,000 on sales commissions to win a contract. Only the $10,000 of commissions is an asset. The legal fees and travel would have been spent whether or not the firm won, so they are expensed. Discretionary bonuses for sales supervisors, based on annual targets, company profitability and individual performance, are not incremental either.

The test is whether the cost depends on signing the contract, not whether it relates to the customer. A commission paid only if the deal closes passes. A salary, a bonus paid for reasons beyond the deal, or a proposal you would have paid for anyway does not.

When can you expense commissions right away

You can expense an incremental cost when it is paid if the asset you would otherwise record would be amortized over one year or less. Paragraph 340-40-25-4 makes this a practical expedient, so it is a choice. A company that uses it must disclose that it does, under 340-40-50-5, though a private company may elect not to (340-40-50-6).

The test is the amortization period, not the contract length. A commission on a 12-month contract can still have an amortization period longer than one year if it relates to renewals you expect, as the next section explains. Then the expedient does not apply, and the commission is capitalized even though the contract is annual.

For a startup whose commissions relate only to a contract of a year or less, the expedient keeps the books simple. For a commission on a multi-year contract, it does not apply.

How long do you amortize a capitalized commission

You amortize the asset "on a systematic basis" consistent with the transfer of the goods or services it relates to (340-40-35-1). Those services can include ones under a specific anticipated contract, such as an expected renewal. So the period follows the customer relationship the commission pays for, which can run past the signed term.

The FASB's Example 2 (340-40-55-5 and 55-6) shows how. A company signs a five-year service contract, renewable in one-year periods, and pays a $10,000 commission at signing. Customers stay seven years on average, and the company expects two renewals. It amortizes the $10,000 over seven years, not five.

For a SaaS subscription recognized evenly over its term, straight-line amortization over the same period usually matches. When the expected timing changes significantly, for example because churn rises, you update the amortization prospectively as a change in estimate (340-40-35-2).

A worked example: one three-year contract

On January 1, 2026, a SaaS startup signs a three-year contract at $60,000 a year with no renewal expected and no commission on any renewal. To win it, the company paid four costs. Only the two that depended on the signature are capitalized.

The $7,200 asset is amortized straight line over the 36-month contract, $200 a month or $2,400 a year:

Expensing the commissions as paid would have put $7,200 in January 2026 on top of the $5,000 of legal fees and travel. Under ASC 340-40, January carries $200 of commission expense, and the rest follows the revenue it paid for. That is the mirror image of the deferred revenue the same contract creates, which is a liability that runs down as you deliver.

What goes on the balance sheet

A capitalized commission is an asset, often labeled deferred commissions or capitalized contract costs. Each month's amortization moves an amount from that asset to expense, so the balance falls as the contract is delivered and reaches zero when the amortization period ends, unless it is impaired first.

The asset is also tested for impairment. Under 340-40-35-3 as amended by ASU 2016-20, you record a loss when the asset's carrying amount exceeds the consideration you still expect to receive for the related services, less the costs of providing them that are not yet expensed. That estimate includes expected renewals with the same customer (340-40-35-4). A loss is never reversed (340-40-35-6).

In practice the trigger is a customer that churns or downgrades early. If the example's customer cancels at the end of 2026 and nothing more will be collected, the $4,800 left on the balance sheet becomes an expense.

What disclosures does ASC 340-40 require

A public business entity describes the judgments behind the amounts it capitalized and its amortization method. It also discloses the closing balance by main category, and the amortization and impairment losses for the period (340-40-50-2 and 50-3). Paragraph 340-40-50-4 lets most private companies elect not to provide those disclosures.

The private-company relief covers disclosure, not recognition. A venture-backed startup that issues GAAP financial statements still capitalizes and amortizes the commissions. Expect an auditor in a first audit to ask for the commission plan, the payouts by deal, and the schedule that ties capitalized commissions to the contracts they belong to.

What to do this month

ASC 340-40 is mostly a records problem: the accounting is a schedule, and the schedule needs each commission tied to a contract. A company that books commissions only as payroll will have to rebuild that link later, deal by deal, when an audit or a diligence request asks for it.

1. Read your commission plan and list every payment that depends on a signed contract: AE commissions, SDR bonuses for closed deals, and referral fees per signed customer.
2. Mark everything else as an expense: salaries, quota-based team bonuses, travel and legal review.
3. For each capitalized cost, pick the amortization period from the contract term and any renewal you expect it to cover.
4. Decide whether to use the one-year expedient, and write the policy down.
5. Build the schedule by contract, and book the amortization in each month-end close.
6. Write off the balance for any customer who cancels.

This only works on accrual books: on the cash method, a commission is an expense the day it is paid. LedgerIt keeps a startup's books on accrual, so revenue and the commissions that won it land in the same months.