ASC 340-40 is the US GAAP subtopic that covers the costs of getting and fulfilling a customer contract under ASC 606. For a SaaS company, its main effect is on sales commissions: a commission you would not have paid if the contract had not been signed is an incremental cost, and you must record it as an asset if you expect to recover it. You then amortize that asset over the period the commission benefits, which can include expected renewals. Base salaries and discretionary bonuses are expensed as incurred. If the amortization period would be one year or less, you may expense the commission straight away.
Below: the rules, quoted from the codification text in Deloitte's revenue recognition roadmap, chapter 13, an 8-quarter roll-forward, and why cash, the P&L and your CAC stop matching once you capitalize.
This article is general information, not accounting, tax or legal advice. Capitalization policy and amortization periods are judgments your auditor will review, so agree them with a qualified accountant.
What ASC 340-40 says about commissions
Three paragraphs do most of the work:
- 340-40-25-1: "An entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs."
- 340-40-25-2: incremental costs are "those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission)."
- 340-40-25-3: costs "that would have been incurred regardless of whether the contract was obtained shall be recognized as an expense when incurred," unless the customer is explicitly charged for them.
Capitalizing is not a policy choice: the boards considered allowing one and rejected it for comparability (Deloitte section 13.2.2). The only way out is the one-year practical expedient.
ASC 340-40 is the cost side of ASC 606 revenue recognition. The commission is spread over the same service delivery that earns the revenue, which mirrors how billed-but-unearned cash sits in deferred revenue until it is earned.
Which sales costs are incremental
The FASB staff gave a simple test, quoted by Deloitte: ask whether the cost would still have been incurred "if the customer (or the entity) decided that it would not enter into the contract just as the parties were about to sign the contract." If yes, it is not incremental.
| Cost | Treatment | Why |
|---|---|---|
| Rep commission paid because a deal closed | Capitalize | The textbook example in 25-2 |
| Commissions to the sales manager and regional manager on the same deal | Capitalize | FASB staff (TRG Agenda Paper 57): the standard "does not make a differentiation based on the function or title of the employee" |
| Second half of a commission paid later, with no service condition | Capitalize all of it | "The timing of payment does not impact whether the costs would have been incurred" |
| Payroll taxes and 401(k) match attributed directly to a capitalized commission | Capitalize | Implementation Q&A 74, Deloitte example 13-6 |
| Commission portion paid only if the rep is still employed a year later (substantive service condition) | Expense over the service period | Deloitte example 13-1: it is pay for ongoing service, not only for the contract |
| Base salary, even if set from last year's bookings | Expense | FASB staff: "Whether the employee sells 100 contracts, 10 contracts, or no contracts, the employee is still only entitled to a fixed salary" |
| Discretionary bonuses based on targets, company profit and performance reviews | Expense | ASC 340-40-55-3: "not directly attributable to identifiable contracts" |
| Legal fees, travel, demo costs on a deal | Expense | They would have been spent even if the customer walked away at signing (55-4) |
All of those rulings come from Deloitte's chapter 13. The staff also warned that the objective "is not to allocate costs that are associated in some manner with an entity's marketing and sales activity." Read your plan closely: a payout that also depends on satisfaction scores or other non-sales factors may not be incremental. If you are still designing the plan, the sales commission calculator models rates, accelerators and clawbacks.
The one-year practical expedient (340-40-25-4)
The text: "As a practical expedient, an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less."
Four details trip people up, all from Deloitte section 13.2.3:
- It tests the amortization period, not the contract term. A one-year contract does not qualify if the commission also relates to expected renewals.
- Slightly over a year is still over. Deloitte's example is a 13-month contract: the expedient is not available.
- It applies to the contract as a whole. The capitalized costs of one contract "form a single asset," so you cannot expense the part tied to year one and capitalize the rest.
- It must be applied consistently to similar contracts: by class, not deal by deal. Electing it requires a disclosure (ASC 606-10-50-22).
If a commission relates to a year or less of service, the expedient lets it hit the P&L when earned. For a new-logo commission that also covers expected renewals, it does not apply.
How long to amortize: renewals and the commensurate test
ASC 340-40-35-1 says the asset "shall be amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates," and adds that the asset may relate to goods or services under "a specific anticipated contract." For SaaS, that anticipated contract is usually the renewal.
In the FASB's own example (ASC 340-40-55-5 and 55-6), a $10,000 commission on a five-year contract with an average customer term of seven years is amortized over seven years, because the entity "anticipates that the contract will be renewed for two subsequent one-year periods."
The key question is whether you pay a renewal commission, and how big it is:
- Renewal commission commensurate with the initial one: amortize over the initial contract term only. Paragraph BC309 of ASU 2014-09 says a longer period "would not be appropriate" in that case.
- No renewal commission, or one that is not commensurate: part of the initial commission relates to the renewals, so the period extends beyond the first term.
"Commensurate" is about proportion to contract value, not effort. The FASB staff, quoted in Deloitte section 13.4.1.2.2, said 5% on both the initial and renewal contract would reasonably be commensurate, while "2% renewal commission as compared to a 6% initial contract commission" would not. Judging it "solely on the basis of the level of effort to obtain the contract" is not consistent with the guidance.
The period "might be, but should not be presumed to be, the entire customer life," per the FASB staff. Deloitte suggests weighing the commission's size relative to the contract, switching costs, how much the product changes, and what you spend to keep customers. When a renewal commission is not commensurate, Deloitte shows two acceptable methods (example 13-17): amortize the whole initial commission over the expected period, or split off the piece that matches the renewal commission, amortize that over the first term, and amortize the rest over the longer period. The worked example below uses the split.
Public SaaS companies disclose what they chose. HubSpot's 10-K for 2025 says commissions on initial contracts "are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be approximately two to four years," based on "the commitment term of the customer contract, the nature of the Company's technology development life-cycle, and an estimated customer relationship period" (HubSpot Form 10-K, fiscal 2025). Commissions on upgrades are amortized over the remaining estimated customer relationship period.
Changes in estimate and impairment
If expected timing changes significantly (say, churn rises and customers stay shorter), ASC 340-40-35-2 requires you to update amortization as a change in accounting estimate under ASC 250-10. That means prospectively, not by restating past periods.
Impairment (35-3) is a recoverability test: you book a loss to the extent the carrying amount exceeds the consideration you still expect for the related services, less the direct costs of providing them not yet expensed. Under 35-4 that consideration includes "expected contract renewals and extensions (with the same customer)," adjusted for credit risk. Under 35-6 an impairment is never reversed. With typical SaaS gross margins it rarely bites, but a deal priced near cost can trigger it. You may apply all of this to portfolios of similar contracts if the result would not differ materially (Deloitte section 13.2.4).
Where it shows up in the financial statements
- Balance sheet. Deloitte (section 14.6.3) accepts either a current/noncurrent split or a single noncurrent asset. HubSpot splits it: $226.2 million current and $219.0 million noncurrent at December 31, 2025.
- Income statement. ASC 340-40 is silent, but Deloitte (section 14.7.4) prefers SG&A, because these are costs of acquiring a contract, not of fulfilling it. In practice it sits in sales and marketing expense.
- Cash flow statement. Commissions are still paid in cash; growth in the asset is a negative adjustment in operating cash flow ($117.0 million for HubSpot in 2025).
- Disclosures. ASC 340-40-50-2 and 50-3 ask for the judgments used, the amortization method, closing balances and the period's amortization and impairment. HubSpot reports deferring $323.5 million of costs in 2025 against $187.8 million of amortization, a net increase of $135.7 million.
Private companies: does this apply to you?
Yes, if you prepare GAAP financial statements, for example for an audit investors or a lender require. ASC 340-40 came in with ASC 606, which for private companies took effect for "annual reporting periods beginning after December 15, 2019" (Deloitte Heads Up, June 3, 2020). That is long past.
Private companies do get relief on disclosure, not on recognition. ASC 340-40-50-4 lets an entity that is not a public business entity elect not to provide the disclosures in 50-2 and 50-3 (Deloitte chapter 15). You still capitalize and amortize. If your books are cash-basis today, expect your first audit to bring this in. Adding the roll-forward to your month-end close from day one is cheaper than rebuilding it later.
Worked example: an 8-quarter commission roll-forward
Illustrative numbers, not a real company. A SaaS company sells annual contracts. Each quarter it signs $400,000 of new first-year ACV (20 customers at $20,000). Reps earn 10% of first-year ACV, paid in cash the quarter the deal signs: $40,000 a quarter. On renewal, reps earn 2% of renewed ACV. 90% of each cohort renews after a year, so from quarter 5 renewals of $360,000 a quarter pay $7,200 in renewal commissions.
Assumptions for the accounting:
- 2% renewal versus 10% initial is not commensurate. Using the split method, the 2% that matches the renewal rate ($8,000 a quarter) amortizes over the 4-quarter initial term; the other 8% ($32,000) amortizes over an assumed 4-year benefit period (16 quarters) that already reflects expected churn.
- Each renewal commission relates to its own one-year renewal (the next one pays the same 2%), so it amortizes over 4 quarters.
- Deals sign at the start of the quarter; amortization is straight-line from that quarter. The 4-year period is an assumption, not a benchmark.
| Quarter | Opening asset | Commissions paid and capitalized | Amortization (P&L expense) | Ending asset |
|---|---|---|---|---|
| Q1 | $0 | $40,000 | $4,000 | $36,000 |
| Q2 | $36,000 | $40,000 | $8,000 | $68,000 |
| Q3 | $68,000 | $40,000 | $12,000 | $96,000 |
| Q4 | $96,000 | $40,000 | $16,000 | $120,000 |
| Q5 | $120,000 | $47,200 | $19,800 | $147,400 |
| Q6 | $147,400 | $47,200 | $23,600 | $171,000 |
| Q7 | $171,000 | $47,200 | $27,400 | $190,800 |
| Q8 | $190,800 | $47,200 | $31,200 | $206,800 |
Q1: $8,000 / 4 + $32,000 / 16 = $4,000. Q5: the Q1 cohort's $2,000 relationship charge, $4,000 for each of cohorts Q2 to Q5, and $1,800 for the first renewal commission ($7,200 / 4) = $19,800.
| Year 1 (Q1 to Q4) | Year 2 (Q5 to Q8) | Total | |
|---|---|---|---|
| Commission cash paid | $160,000 | $188,800 | $348,800 |
| Commission expense in the P&L | $40,000 | $102,000 | $142,000 |
| Difference (added to the asset) | $120,000 | $86,800 | $206,800 |
At the end of Q8, $86,800 of the $206,800 asset is scheduled to amortize over the next four quarters. That is the current portion if you split the balance; the other $120,000 is noncurrent.
Cash vs P&L: why EBITDA, CAC and payback look different
In year 1 the company paid $160,000 of commissions but expensed $40,000. Operating income and EBITDA are $120,000 higher than under expense-as-paid; operating cash flow is not. The amortization is a selling expense, so it stays inside EBITDA, which therefore misses the cash parked on the balance sheet. While the sales team grows, new capitalization runs ahead of amortization and the gap widens.
The same effect reaches unit economics. Suppose other sales and marketing spend is $300,000 a quarter and the company adds 20 customers a quarter. For year 1:
- CAC on a cash basis: ($1,200,000 + $160,000) / 80 = $17,000.
- CAC from the GAAP P&L: ($1,200,000 + $40,000) / 80 = $15,500.
At $20,000 ACV ($1,666.67 MRR) and an assumed 80% gross margin, CAC payback is 12.75 months on cash and 11.6 months on the P&L figure. For runway and hiring plans, use the cash figure. If you calculate payback with the CAC payback calculator, feed it CAC built from cash paid, and label which basis you used when you show it to investors.
Capitalized software development works the same way; see capex in software development and the new ASU 2025-06 rules.
Tax treatment is different
Tax does not follow ASC 340-40. Under Treasury Regulation §1.263(a)-4(e)(4), employee compensation, defined to include "salary, bonuses and commissions" paid to an employee, is treated as an amount that does not facilitate the acquisition or creation of an intangible. So that regulation does not require commissions paid to your own employees to be capitalized. The usual result is a book-tax difference: capitalized for GAAP, deducted under the normal timing rules for tax. Commissions paid to non-employees, such as outside resellers, fall outside that definition. Confirm your treatment with a tax adviser.
Frequently asked questions
Are sales commissions capitalized under ASC 606?
Yes, under ASC 340-40, the companion to ASC 606: incremental commissions you expect to recover are capitalized unless the one-year expedient applies.
What is the one-year practical expedient for commissions?
ASC 340-40-25-4 lets you expense the cost when incurred if the asset would amortize over one year or less, counting any renewals the commission relates to.
How long should capitalized commissions be amortized?
Over the period the commission benefits: the initial term if renewal commissions are commensurate, longer if they are not or none are paid, but not presumed to be the whole customer life. HubSpot uses approximately two to four years.
Is amortization of capitalized commissions included in EBITDA?
Deloitte prefers presenting it in SG&A, so it sits in operating expenses and EBITDA. For any adjusted EBITDA, check the definition.
Do private companies have to follow ASC 340-40?
Those reporting under US GAAP do. They can skip the 50-2 and 50-3 disclosures, not the accounting.
Modeling commissions in Adlega
For planning you need both views of a commission: the cash that leaves when a deal signs, and the expense your accountant books. A forecast built only on the P&L overstates runway while the sales team grows. Adlega builds a driver-based 36-month SaaS model with native MRR, ARR, churn, CAC, burn and runway, so you can run scenarios on bookings and sales hiring and see what they do to burn and runway. The AI CFO explains how each number is calculated. The ASC 340-40 roll-forward itself still belongs in your accounting system and with your accountant.