Key takeaways
The TFRS 15 question is whether the cost is incremental, not whether the recipient is an employee or an agent. Commission paid only when a sale is made is an asset (a cost of obtaining a contract), whether it goes to an employee or an agent. Salaries and bonuses that are not tied to obtaining a contract are expensed immediately.
The principle of incremental costs of obtaining a contract
Businesses that rely on a sales team usually pay commission to motivate them to close sales. The accounting question is whether to expense it immediately or to recognise it as an asset and amortise it as the goods or services are transferred. TFRS 15 paragraphs 91-95 require that incremental costs of obtaining a contract, if expected to be recovered, are recognised as an asset and amortised systematically, consistent with the transfer of the goods or services under the contract.
- The cost arises because the contract was obtained. If the contract had not been obtained, the cost would not have arisen.
- It is not a cost that would have been incurred anyway, whether or not the contract was obtained.
Classify by the nature of the payment, not by the status of the recipient
| Characteristics | In-house staff | External agents | Accounting treatment |
|---|---|---|---|
| Paid when the sale of that contract closes | Commission per unit sold | Commission-only | Incremental: capitalise as an asset, then amortise |
| Incurred whether or not the contract is obtained | Salary, contributions, benefits | Fixed monthly consultancy fee | Not incremental: expense immediately |
| Linked to overall performance or other criteria | Annual bonus based on overall results | Retainer based on total sales not linked to contracts | Assess case by case; mostly expensed |
Caution: Arguing that staff commission is employment compensation and so should be expensed immediately is valid only where the payment would genuinely have been incurred anyway. If it is paid because that unit was sold, it is also incremental. Look at the terms in the commission policy, not the account name.
The practical expedient in paragraph 94
An entity may choose to recognise the cost as an expense immediately if the amortisation period of the asset would be one year or less. For Presale projects where the period from booking to transfer exceeds one year, this option cannot be used. However, completed units sold and transferred within one year may qualify, provided it is set out in the policy and applied consistently to contracts of a similar nature.
Accounting entries
A Costs that are not incremental
Dr Selling expenses, salary or bonus / Cr Cash or accrued expenses
B Incremental commission, for both employees and agents
Dr Asset: cost of obtaining a contract / Cr Cash or commission payable
C On ownership transfer
Dr Selling expenses, commission (amortisation) / Cr Asset: cost of obtaining a contract
Where condominium unit sales are recognised as revenue at a point in time, amortisation occurs on the transfer day. If a contract is cancelled before transfer, consider clawback and impairment under paragraph 101.
Decision Tree
| Questions | Yes | No |
|---|---|---|
| Is it paid directly because that contract was obtained? | Go to the next question | Expense immediately |
| Is it expected to be recovered from sales revenue? | Go to the next question | Expense immediately |
| Is the amortisation period one year or less, and does the entity elect the practical expedient? | Expense immediately | Capitalise and amortise on transfer |
What to include in the accounting policy
- Define which payments are incremental according to the terms of the commission policy.
- Track the asset unit by unit so that amortisation matches the transfer day.
- Review impairment and contract cancellations at the end of every period.
- Entities applying TFRS for NPAEs should confirm the policy with the auditor, as there is no specific guidance equivalent to TFRS 15.
- Put the approach in writing so that the sales and accounting teams use the same basis.
This decision is not about choosing an account code. It reflects the appropriate matching of costs with the related revenue, so that the financial statements show the results of each period correctly.