New revenue standard ASU 2014-09 Topic 606 (ASC 606) will significantly change revenue recognition for many of us, across all industries. The new standards may also affect how companies account for commission expense. The new rules require companies to capitalize the costs of obtaining a contract (such as sales commission) at contract signing if the contract is longer than one year. You can read more about these contract acquisition costs in ASU 2014-09 Topic 606 Subtopics 340-40-25-1 and 340-40-35-1.
Capitalized commission is then deferred over a period of time. Generally, if the commission paid to acquire this contract is a one-time commission paid at the start of the life of the customer, the commission should be deferred over the estimated life of the customer. In this case, any renewal commission paid are much smaller than the original commission paid and would be deferred over the remaining estimated life of the customer. Alternatively, if at each contract renewal a similar commission is paid, the commission should be deferred over the term of the contract.
This blog is about going back to the basics in accounting, and the objective of the post is to walk you through the correct way to book a deferred commission journal entry under ASC 606.
Journal: Deferred Commission Journal Entry under ASC 606
Frequency: Each pay period, or each reporting period (i.e. monthly)
FloQast folder location (learn more about FloQast folders): ‘Deferred Commission’ is an area on your balance sheet and will have a corresponding folder in FloQast.
The dr.’s and cr.’s
|6/30/17||Deferred commission (asset)||$10,000|
|Deferred commission contra expense||$10,000|
Memo: To capitalize commissions that were paid and expensed on the payroll journal entry
|7/31/17||Amortization – commission (expense)||$160|
|Deferred commission accumulated amortization (contra asset)||$160|
Memo: To expense commission payments based on ACS 606
Reconciliation (click here for 3 best practice Excel reconciliation templates)
- List all contracts, by line item. Match these line items to the commission payments. Defer out the payments over the life of the customer or the term of the contract, whichever matches the way your company pays commission.
- Agree your gross deferred asset to commissions capitalized over all time.
- Agree your accumulated amortization contra asset to commissions expensed over all time.
- Review commission expense on your income statement for reasonableness, or recalculate
- When you record your payroll journal, commission will debit commission expense. When you capitalize these commissions, use a contra expense account to reduce the expense. Crediting directly to commission expense will understate your gross wages paid. You won’t be able to verify the wage amounts on you trial balance to W-2s at year end, and auditors will have a very hard time testing and performing analytics over commission.
- Not having the right IT tools: matching each and every commission payment to a line item on a contract can be tedious work. Find out early if you need to invest in software that can automate this process and provide the data you need to prepare your journal entry.
- Not applying new standards properly: ASC 606 is new for everyone! Engage your CPA early to ensure your interpretation, accounting, and disclosures are appropriate.
How auditors audit
- Auditors will scrutinize your contracts, commission policy, and revenue recognition policy. Have these written up in memos or policy documents.
- Auditors may also select contracts and payroll registered for detailed testing, or perform analytics over commission expense. Make sure you have the details of your deferred commissions clean and ready for review.