What is commission amortization?
Commission amortization is the gradual expensing of commission that has been recorded as an asset. When a company capitalizes commission under IFRS 15, the commission first sits on the balance sheet. It is then moved into the income statement bit by bit as the customer receives the service.
Amortization does not change the rep's pay. It only decides in which months the cost is booked.
Over what period?
Under IFRS 15, paragraph 99, the asset is amortized on a systematic basis consistent with the transfer to the customer of the goods or services it relates to. That can include anticipated renewals. In practice, the period depends mainly on this:
| Situation | Typical period |
|---|---|
| A similar renewal commission is paid when the customer renews | The term of the first contract |
| No or much lower commission is paid on renewal | The expected customer lifetime, including renewals |
The expected customer lifetime can be estimated from your historical churn rate. The estimate must be justifiable and is worth discussing with your auditor.
Methods
- Straight-line: the same amount each month. The simplest method when the customer pays a fixed amount.
- Revenue-based: the amount follows the revenue the customer generates, for example when the price rises year by year.
Example
A rep earns $3,600 in commission on a 2-year contract. No commission is paid on renewal, and the customer is expected to stay 4 years. The commission is amortized straight-line over 48 months: $3,600 ÷ 48 = $75 a month, or $900 a year.
| Year | Expensed | Asset at year end |
|---|---|---|
| Year 1 | $900 | $2,700 |
| Year 2 | $900 | $1,800 |
| Year 3 | $900 | $900 |
| Year 4 | $900 | $0 |
If the customer cancels at the end of year 2, the remaining $1,800 can no longer be recovered. It is impaired and expensed at once.
Impairment and changes
- Cancellation: if the asset exceeds what the customer is still expected to pay, less the direct costs of delivering, the difference is impaired (IFRS 15, paragraph 101).
- Clawback: if the commission is recovered through a clawback, the asset is corrected accordingly.
- New estimates: if the expected customer lifetime changes, amortization is adjusted going forward.
FAQ
Is amortization the same as depreciation?
Both spread a cost over several periods. Amortization is the word used for intangible assets such as capitalized contract costs; depreciation is used for physical assets.
Should renewals be included in the period?
They can be, if no similar commission is paid on renewal. If the same commission is paid again, the new commission covers the renewal, and the first commission is normally spread over the first contract only.
What happens if the customer cancels?
The remaining asset cannot be recovered and is impaired. The cost lands in the period of the cancellation.
Does this apply to every company?
It applies to companies that capitalize commission, typically because they report under IFRS. Companies that expense commission straight away have no asset to amortize. See commission accounting.
Data for amortization from Prowi
Prowi calculates commission live from CRM data and shows on the commission statement which deals it comes from, including clawbacks and corrections. Approved amounts are passed on to payroll, and finance has commission per deal as the basis for amortization. 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.