Who it's for: accountants and controllers in SaaS companies who pay sales commissions and need to account for them under IFRS 15, FRS 102 or US GAAP.
What you'll get: what counts as a capitalisable contract cost, how to pick the amortisation period, a monthly process, three worked examples with journals, and a risks and controls table.
Reading time: about 12 minutes. Have the commission plan open; you'll need it.
Why commissions don't always hit the P&L when they're paid
A salesperson closes a three-year deal and gets paid commission next month. The customer pays you over three years. If the full commission goes through the P&L in one month, sales costs spike in the month of a big win and look oddly low later. The accounting standards deal with this by letting (and under IFRS 15, requiring) you to treat certain commissions as an asset and spread them over the period the contract benefits you. It's one of the few times sales and finance want the same thing: a smoother number.
Key terms
- Contract cost asset: a balance sheet asset for costs of winning a customer contract, released to the P&L over time.
- Incremental cost of obtaining a contract: a cost you'd only incur because the contract was signed. Commission paid on signing is the classic example. A salesperson's base salary isn't, because it's paid either way.
- Amortisation: spreading the asset's cost over the period of benefit.
- Amortisation period: the period over which the contract (and any expected renewals the commission relates to) benefits the company.
- Commensurate: in this context, a renewal commission that's broadly in line with the original commission. If renewals earn a much smaller commission, the original one is treated as covering the expected renewals too.
- Practical expedient: an optional shortcut a standard allows. Here, expensing commissions straight away if the amortisation period would be a year or less.
What the standards say, in plain English (as at October 2026)
| Framework | Capitalise? | Shortcut for short periods |
|---|---|---|
| IFRS 15 | Required, if the costs are incremental and expected to be recovered | Optional: expense if the amortisation period is one year or less |
| FRS 102 (periods beginning on or after 1 January 2026) | Accounting policy choice: capitalise or expense, applied consistently | If expensing is chosen, no asset arises at all |
| US GAAP (ASC 340-40, alongside ASC 606) | Required, broadly as IFRS 15 | Optional: expense if the amortisation period is one year or less |
The FRS 102 change came in with the periodic review amendments, effective for periods beginning on or after 1 January 2026 (with early application allowed if all the amendments are adopted together). Before that, many FRS 102 reporters simply expensed commissions as incurred. If your company reports under FRS 102, the first decision is the policy, and that's a decision for the company and its auditors, not something to back into at month-end.
Whichever framework applies, the asset is typically amortised on a basis that matches how the related service is delivered. For a subscription, that usually means straight-line over the amortisation period.
What usually qualifies, and what doesn't
| Cost | Usually capitalisable? | Why |
|---|---|---|
| Commission paid on signing a new contract | Yes | Only paid because the contract was won |
| Sales manager override commission on the same deal | Often yes | Still triggered by the specific contract |
| Commission on renewals or upsells | Yes, as its own asset | Incremental to the renewal or upsell contract |
| Employer payroll taxes on capitalised commission | Often yes, check your policy | Many teams treat them as part of the incremental cost |
| Base salaries, bonuses for team targets, SPIFs not tied to a contract | No | Paid whether or not a particular contract is signed |
| Bid costs, legal review, travel to pitch | No | Incurred whether or not the contract is won |
The monthly process
| Step | What "done" looks like | |
|---|---|---|
| ☐ | Get the month's commission calculation from sales ops, by deal | Each commission line linked to a contract ID |
| ☐ | Classify each line: capitalisable or expense | Classification follows the written policy |
| ☐ | Assign an amortisation period to each capitalised line | Period matches contract term or expected customer life per policy |
| ☐ | Add new lines to the commission schedule | Schedule shows deal, cost, start date, period, monthly charge, balance |
| ☐ | Post the capitalisation and the monthly amortisation | Journals agree to the schedule totals |
| ☐ | Check for churned, cancelled or clawed-back deals | Balances on lost customers written off; clawbacks credited to the asset |
| ☐ | Agree schedule closing balance to the ledger | No difference, or every difference explained |
| ☐ | Reviewer signs off | Name and date on the working paper |
AI shortcut: give an approved AI tool the commission plan document and the month's commission report. Ask it to tag each line as "tied to a specific signed contract" or "not tied to a contract", quoting the plan clause it relied on. You review every tag before anything is capitalised. It's also good at spotting deals in the commission report that don't appear in the billing system yet.
Worked example 1: a three-year deal
MonthEndClub Co Ltd (fictional) reports under IFRS 15. On 1 October it signs a three-year contract at £72,000 a year. The account executive earns 10% of first-year contract value: £7,200, paid through November payroll. There's no commission on renewal, and the contract benefits the company for 36 months.
October: capitalise the commission.
| Account | Dr | Cr |
|---|---|---|
| Contract costs (asset) | £7,200 | |
| Commission accrual | £7,200 |
The accrual clears when the commission is paid through payroll in November.
Every month from October: amortise. £7,200 ÷ 36 = £200.
| Account | Dr | Cr |
|---|---|---|
| Sales commission expense | £200 | |
| Contract costs (asset) | £200 |
At 31 October the asset is £7,000. After 12 months it's £7,200 − (12 × £200) = £4,800.
Worked example 2: renewals with a smaller commission
MonthEndClub Co Ltd signs a 12-month contract at £48,000. Commission is 10% (£4,800) on new deals, but only 2% (£960) on each renewal. The renewal commission isn't commensurate with the original, so the original commission is treated as relating to expected renewals too. Based on its retention data, the company expects a typical customer like this to stay four years.
| Commission | Amount (£) | Amortisation period | Monthly (£) |
|---|---|---|---|
| New deal | 4,800 | 48 months (expected customer life) | 100 |
| Each renewal | 960 | 12 months (the renewal term) | 80 |
Check: £4,800 ÷ 48 = £100; £960 ÷ 12 = £80. Because each renewal commission covers only 12 months, the company could use the practical expedient and expense it when incurred. Whichever it chooses, the choice is written into the policy and applied consistently.
AI shortcut: estimating expected customer life is a judgement, but the data work isn't. Give an approved AI tool an anonymised list of customer start and end dates by segment, and ask it to calculate average customer lifetime and the share of customers still active after 1, 2, 3 and 4 years. A person decides what period to use and documents why.
Worked example 3: the customer leaves early
Back to the three-year deal. The customer goes into administration after 12 months and the contract ends. The remaining asset of £4,800 no longer has any future benefit.
| Account | Dr | Cr |
|---|---|---|
| Sales commission expense (write-off) | £4,800 | |
| Contract costs (asset) | £4,800 |
If the commission plan claws back part of the commission when a customer leaves early, the clawback reduces the loss. For example, a 50% clawback of £3,600 would be recovered from the salesperson's next pay, and the write-off to expense would fall to £1,200.
| Account | Dr | Cr |
|---|---|---|
| Commission clawback receivable | £3,600 | |
| Sales commission expense (write-off) | £1,200 | |
| Contract costs (asset) | £4,800 |
If you report under US GAAP (ASC 606)
ASC 340-40 works much like IFRS 15: incremental costs of obtaining a contract are capitalised if expected to be recovered, with the same optional one-year shortcut. There's no FRS 102-style choice to expense. US teams also tend to call the asset "deferred commissions". Amortisation periods, the commensurate test and impairment work in a similar way.
Common mistakes and audit watch-outs
- Capitalising things that aren't incremental. Team bonuses, base pay and pitch costs don't qualify.
- Using the contract term when renewals aren't commensurate. If renewal commission is much lower, the original commission is typically spread over expected customer life.
- No support for expected customer life. Auditors will ask how it was worked out. Keep the retention analysis on file and refresh it periodically.
- Forgetting churned customers. A balance on a customer who's left is an asset with no benefit. Check the churn list every month.
- Schedules that don't link to contracts. Every line on the schedule needs a contract ID that matches the billing system.
- FRS 102 reporters assuming nothing's changed. The 2026 amendments introduced an explicit policy choice. The policy needs to be decided and documented.
- Letting AI classify commission lines without review. AI can misread a commission plan's wording. Every classification is checked against the plan by a person before capitalisation.
Tools that can help
Commission tools often export by-deal commission data that maps neatly onto a capitalisation schedule. NetSuite and some billing platforms can run amortisation schedules. Excel or Google Sheets works well for most smaller teams, with one row per deal and a check total against the ledger. An approved AI assistant can help classify lines and analyse retention data. None of these replace the policy or the review; they just keep the schedule tidy.
Key risks and controls
| Risk | Control | How to evidence it |
|---|---|---|
| Non-incremental costs capitalised | Written policy listing what qualifies; monthly classification review | Policy document; signed classification of each line |
| Wrong amortisation period | Expected customer life based on retention data, refreshed annually | Retention analysis on file, with approval |
| Asset overstated after churn | Monthly check of schedule against churned and cancelled contracts | Churn list ticked off against the schedule |
| Schedule doesn't agree to ledger | Monthly schedule-to-ledger reconciliation | Signed reconciliation with nil difference |
| AI misclassifies commission lines | Approved tools only; person checks every tag against the plan | Reviewer sign-off on the AI-tagged list |
Rates, thresholds and rules in this guide
Figures were checked against the pages below in October 2026. They change regularly (often each April or at Budget time), and we can't guarantee they're still current or right for your situation. Always check the official page before relying on them.
- Contract costs and IFRS 15 (BDO): IFRS 15 capitalisation of incremental costs and the one-year practical expedient
- Long-term contracts under FRS 102 (ACCA): FRS 102 policy choice to capitalise or expense, effective 1 January 2026
- FRS 102 revenue accounting changes 2026 (Forvis Mazars): effective date and early application only if all amendments are applied together
- Incremental costs of obtaining a contract (RevenueHub): ASC 340-40 capitalisation and the one-year practical expedient
Key takeaways
- Only costs triggered by signing a specific contract are candidates for capitalisation.
- IFRS 15 and US GAAP require capitalisation (with a one-year shortcut); FRS 102 now offers a policy choice for periods from 1 January 2026.
- If renewal commissions aren't commensurate, spread the original over expected customer life.
- Write off balances on customers who leave, net of any clawback.
- Keep one schedule, linked by contract ID and agreed to the ledger monthly.
- Use AI to classify and analyse; people decide and sign off.
FAQs
Do we have to capitalise commissions under FRS 102?
Not since the amendments for periods beginning on or after 1 January 2026: FRS 102 now gives a policy choice to capitalise or expense costs of obtaining a contract. The choice is applied consistently and disclosed. Check the final wording of the standard and talk to your auditors before changing policy.
What about commissions paid in instalments?
The cost is usually recognised when the obligation arises (often on signing), even if it's paid in stages. If later instalments depend on something else happening, such as the customer paying, they may be treated differently. Look at what triggers each payment in the plan.
Does capitalising commissions affect cash or CAC?
No effect on cash: the commission is paid when it's paid. For CAC (customer acquisition cost), many teams use the cash commission figure rather than the amortised P&L charge, so the metric isn't distorted by the accounting.
Can AI work out which commissions to capitalise?
It can make a strong first pass by reading the commission plan and tagging each line, and it's quick at retention analysis. The policy decision, the customer life judgement and the sign-off stay with people. Use only company-approved tools for payroll and commission data.
Related guides
- SaaS Revenue Recognition in Plain English (IFRS 15 / ASC 606)
- Payroll Journals and Bonus Accruals at Month-End
- Capitalising Software Development Costs: When and How
- SaaS Metrics Formula Sheet (CAC Payback, LTV, Magic Number, Rule of 40)
More in Costs and Accruals guides.
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This guide is general information about common practice. It isn't tailored to any business, and standards, tax rules and figures change. Check your own circumstances, the latest rules and, where needed, a qualified professional before acting.
Last reviewed: October 2026.