Deferred Commissions Under ASC 340-40: Capitalizing and Amortizing Costs to Obtain a Contract

What ASC 340-40 Requires

• ASC 340-40 governs the incremental costs of obtaining a customer contract, and it is the companion guidance to the ASC 606 revenue standard.
• An incremental cost is one you would not have incurred if the contract had not been signed, and a sales commission is the classic example.
• If the cost is incremental and you expect to recover it, you must capitalize it as an asset rather than expense it immediately.
• This treatment is not optional under GAAP, so accrual-basis SaaS companies cannot simply run commissions through the income statement as they are paid.