A sales representative earns a $2,000 commission for signing a new customer to a contract, and the asset that would otherwise be recognized for this cost would have an amortization period of nine months. Under the practical expedient in ASC 340-40-25-4, how may the entity account for this incremental cost of obtaining the contract?
- The entity may recognize the $2,000 as an expense when incurred, because the amortization period of the asset it would otherwise have recognized is one year or less
- The entity must capitalize the commission and amortize it over the customer's entire expected lifetime as a customer, regardless of contract length
- The entity must expense the commission only if the underlying customer contract happens to be cancellable
- The entity may never expense a sales commission and must always capitalize it under ASC 340-40
Correct answer: A. The entity may recognize the $2,000 as an expense when incurred, because the amortization period of the asset it would otherwise have recognized is one year or less
ASC 340-40-25-4 offers a practical expedient allowing an entity to recognize the incremental costs of obtaining a contract, such as a sales commission, as an expense when incurred if the amortization period of the asset that would otherwise be recognized is one year or less, and a nine-month period qualifies. Capitalizing the commission over the customer's entire expected lifetime describes an approach relevant when commissions relate to anticipated renewals rather than a single short contract, not the short-amortization expedient itself, and it is not triggered simply by the contract being nine months long. Whether the underlying contract is cancellable is not the trigger for this expedient; the trigger is the length of the amortization period the incremental cost would otherwise be recognized over. The final option is also wrong because ASC 340-40 permits capitalization by default for incremental costs expected to be recovered; it is only this specific short-period expedient that additionally permits immediate expensing instead of capitalization.
Source: FASB Accounting Standards Codification: ASC 340-40-25-4, Other Assets and Deferred Costs — Contracts with Customers