For SaaS founders, few accounting changes have been as disruptive as ASC 606's impact on commission accounting. Paying commissions and expensing them immediately used to be straightforward, but these days, it’s a task that’s transformed into a complex compliance exercise that can significantly impact your financials and operations.
ASC 606 introduced a few key changes to the sales commissions accounting process, and failure to comply can result in material misstatements that impact audits, investor due diligence, and lender relationships. Even unintentional errors can delay financing rounds, trigger audit adjustments, or complicate a future sale.
Unlike other ASC 606 changes that primarily affect revenue recognition, commission accounting fundamentally alters how you track, report, and manage a significant expense category. This guide provides practical guidance for navigating these requirements while building processes that support both compliance and better business decision-making.
Before ASC 606, if a sales rep closed a three-year contract and earned $150,000 in commission, you’d expense the full amount immediately. Now, that $150,000 must be capitalized and amortized over the life of the contract — three years in this example. This change comes from ASC 340-40, which governs “costs to obtain a contract.” The logic is straightforward: if you recognize revenue over time, you should recognize the related acquisition costs over the same period.
Not all commissions qualify for capitalization. This treatment applies only when all three of the following conditions are met:
Variable commissions tied directly to deal closure typically meet the first test; base salaries and general marketing costs do not. Most SaaS businesses with healthy unit economics satisfy the recoverability test, but the rationale should be documented. There’s one important exception: you can elect to expense all commissions immediately for contracts of one year or less, provided the policy is applied consistently across all similar contracts.
Typically capitalized:
Typically expensed:
Renewal commissions require additional judgment under ASC 606 because of what’s known as the “commensurate” rule. The guidance says you cannot extend amortization beyond the initial contract term if the commission paid on a renewal is commensurate with the commission paid on the initial contract, meaning it’s essentially the same in amount or rate, even if the dollar figure is smaller due to the shorter term.
If your renewal commissions are significantly lower than initial commissions, reflecting the lower cost of retaining a customer versus acquiring one, you may be able to justify amortizing the initial commission over a longer period that includes expected renewals. In either case, your policy should be supported by a documented comparison of initial and renewal commissions, along with the rationale for your chosen approach.
Related: The Ultimate Guide to SaaS Business Accounting
Once you've determined which commissions to capitalize, you need to establish how long to amortize them. Most SaaS companies use 3-5 year periods, but the choice requires solid business justification.
There are two main approaches: amortize over the initial contract plus highly probable renewals, which provides conservative, shorter periods but may not capture the full economic benefit of customer acquisition; or amortize over expected customer relationship duration based on retention data, which better reflects economic reality but requires more complex analysis and documentation.
Your choice should consider several key factors:
The guidance allows alternative approaches, including using the life of the underlying software platform, which can simplify annual updates while remaining compliant. Whatever approach you choose, expect auditors to request detailed support for your assumptions, including renewal rate analyses and customer lifetime data that justify your chosen amortization period.
Understanding the compliance rules is one thing; putting them into practice is another. The operational changes under ASC 606 often surprise founders with their scope and complexity. You’ll need detailed commission records by deal, customer, and sales rep, and many teams find spreadsheets become unmanageable as deal volume grows.
Each month, you’ll post recurring journal entries — one to capitalize new eligible commissions, another to amortize existing balances — along with any adjustments for contract modifications or early terminations. Quarterly reviews of amortization assumptions are necessary to reflect changes in customer retention, renewal patterns, or commission structures.
The financial statement effects matter for both internal decision-making and external reporting. Commission assets appear on the balance sheet as contract cost assets, potentially influencing working capital metrics and debt covenant ratios. On the P&L, expenses are spread more evenly instead of spiking when large deals close, but that smoother recognition can obscure short-term performance swings that management needs to monitor. On the cash flow statement, cash outflows remain unchanged, creating timing differences between when commissions are paid and when they’re expensed.
At this point, many founders realize they need specialized expertise to navigate these complexities effectively. At G-Squared Partners, we help SaaS companies implement sustainable processes that meet compliance requirements while providing meaningful business insights. Whether you need initial setup guidance or ongoing support, our fractional CFO services bring deep SaaS expertise without full-time overhead.
Audit scrutiny around commission accounting has intensified, making proper preparation essential to prevent costly delays and potential restatements. Auditors expect:
Your documentation should include detailed commission registers linking payments to specific deals, quarterly reviews of assumptions with supporting data, clear audit trails from payments through amortization, and reconciliations showing unamortized balances at each reporting date.
Data integration challenges often arise when connecting CRM systems, commission tracking, and accounting software, frequently requiring custom development or creating manual bottlenecks. Inconsistent application of policies, such as treating similar commission types differently without clear rationale, frequently triggers audit findings. Insufficient documentation around amortization assumptions or capitalization decisions creates compliance risk, while policy drift occurs when initial approaches work well but become inconsistent as business models evolve without corresponding accounting updates.
Technology solutions can streamline compliance significantly. Automated commission software centralizes data, calculates amortizations automatically, and maintains comprehensive audit trails. Key features to prioritize include ASC 606 compliance capabilities, integration with existing systems, and scalability for growing transaction volumes. While manual processes might work initially, automated solutions become essential as complexity grows, and the investment typically pays for itself through reduced manual effort and compliance risk.
Success requires viewing commission accounting as an ongoing operational discipline rather than a one-time compliance project. Customer behavior evolves, product offerings change, and commission structures adapt—your accounting policies must keep pace. Annual policy reviews should assess customer lifetime data, renewal rates, and commission structures, adjusting amortization periods when customer behavior shifts meaningfully. Cross-functional coordination between sales, finance, and accounting teams ensures consistent data flow and policy application, while investment in proper systems becomes essential as complexity grows.
The enhanced tracking and analysis required for ASC 606 often provides valuable business insights beyond compliance. Better visibility into customer acquisition costs, sales efficiency, and customer relationship economics can improve strategic decision-making across your organization. Many companies find that the discipline required for commission accounting compliance leads to more rigorous financial management practices overall, creating competitive advantages that extend well beyond regulatory requirements.
ASC 606 commission accounting doesn't have to derail your focus from growing your business. At G-Squared Partners, we specialize in helping SaaS companies implement robust, audit-ready processes that turn compliance requirements into strategic advantages.
Our team brings deep SaaS expertise from initial policy development through ongoing compliance support. We help establish sustainable processes, implement appropriate technology solutions, and maintain the documentation standards auditors expect—all while providing insights that improve business decision-making.
Whether you're implementing ASC 606 for the first time, struggling with existing processes, or preparing for audit scrutiny, our fractional CFO and specialized accounting services provide the expertise you need without full-time overhead.
Contact G-Squared Partners today to transform commission accounting from a compliance burden into a competitive advantage for your SaaS business.