What is capitalizing commission?
Capitalizing commission means recording sales commission as an asset on the balance sheet instead of expensing it straight away. The asset is then expensed over the period in which the customer receives the service. The rule comes from the international accounting standard IFRS 15, Revenue from Contracts with Customers, paragraphs 91-94. The US equivalent is ASC 340-40.
It is an accounting rule. It does not change when or how much the rep is paid. It only changes when the cost shows up in the income statement.
When must commission be capitalized?
Under IFRS 15, a company recognizes as an asset the incremental costs of obtaining a contract with a customer if it expects to recover them. An incremental cost is one the company would not have incurred if the contract had not been obtained. The standard itself uses sales commission as the example.
| Cost | Capitalized? |
|---|---|
| Commission per won deal | Yes, when it is only paid because the contract was signed |
| Sales rep base salary | No, it is paid whether or not the deal closes |
| Bonus on a total quarterly target | Case by case: can the bonus be tied to specific contracts? |
| Travel, demos and proposal work | No, they are incurred regardless of the outcome |
There is a practical expedient (paragraph 94): if the amortization period is one year or less, the company may expense the commission when incurred. The question therefore matters most for contracts that run longer than a year.
Example
A SaaS company closes a 3-year contract with a total contract value of $54,000. The rep earns 10% of TCV: $54,000 × 10% = $5,400, paid in one go.
| Year | Expensed at once | Capitalized and spread | Asset at year end |
|---|---|---|---|
| Year 1 | $5,400 | $1,800 | $3,600 |
| Year 2 | $0 | $1,800 | $1,800 |
| Year 3 | $0 | $1,800 | $0 |
| Total | $5,400 | $5,400 |
The total cost is the same. The difference is timing: with capitalization, the cost follows the revenue the contract brings in. How the asset is spread over time is covered under commission amortization.
Renewals, clawbacks and cancellations
- Renewals: If the company expects the customer to renew without a similar commission being paid again, the period can be longer than the first contract.
- Clawbacks: If commission is recovered through a clawback, both the commission and the capitalized amount need correcting.
- Cancellation: If the customer cancels early, the asset can no longer be recovered and must be impaired (IFRS 15, paragraph 101).
Who follows IFRS 15 in Denmark?
Listed companies in the EU prepare consolidated accounts under IFRS and therefore follow IFRS 15. Companies that report under the Danish Financial Statements Act (årsregnskabsloven) follow the Act's own rules. Among other things, the Act requires transactions to be recognized when they occur, regardless of when payment is made (section 13(1)(6)). Whether commission can be capitalized depends on the accounting policy the company has chosen. Check with your auditor before changing policy. Day-to-day bookkeeping is covered under commission accounting.
What it means for the commission plan
- Finance needs commission per deal, not just per rep and month.
- The contract start date and term must be known and correct in the CRM.
- Clawbacks and corrections must be traceable to the original deal.
FAQ
Is commission an expense or an asset?
It can be either. Under IFRS 15, commission that is only paid because a contract was obtained is an asset, expensed over the contract period. Base salary and other costs incurred regardless of the outcome are expensed straight away.
Do smaller companies have to capitalize commission?
IFRS 15 applies to companies that report under IFRS. Most smaller Danish companies report under the Danish Financial Statements Act. Ask your auditor which policy fits your accounts.
What is ASC 340-40?
ASC 340-40 is the US GAAP rule for costs of contracts with customers. It broadly matches the contract cost rules in IFRS 15.
Does capitalization change what the rep is paid?
No. The rep is paid according to the commission plan. Capitalization only affects when the cost is booked in the accounts.
Commission per deal with Prowi
Prowi calculates commission live from CRM data and shows on each rep's commission statement which deals the amount comes from. Approved amounts are passed on to payroll. The capitalization itself happens in your accounts, but with commission broken down by deal, finance has the basis it needs. Book a demo.
In Prowi
Every term on this page is a rule you can write into a commission model in Prowi. The model reads the deal from HubSpot the second it closes, applies the rule, and the rep sees the result on their phone before the day is over.