A company capitalizes a $6,000 sales commission under ASC 340-40 for a two-year service contract with a single customer. The contract has no renewal option, and the company transfers the service to the customer evenly over the two years. Under ASC 340-40-35-1, over what period should the company amortize the $6,000 asset?
- Immediately upon signing, since the commission was earned in full at contract inception
- On a systematic basis consistent with the transfer of the service to the customer, which here means evenly over the two-year contract term
- Over the average useful life the company assigns to its sales force compensation plans generally
- Over five years, matching a standard amortization period used for most intangible assets under US GAAP
Why B? And why not the others?
Correct answer: B. On a systematic basis consistent with the transfer of the service to the customer, which here means evenly over the two-year contract term
ASC 340-40-35-1 requires that an asset recognized for incremental costs of obtaining a contract be amortized on a systematic basis consistent with the transfer to the customer of the goods or services to which the asset relates; because the service here is transferred evenly over the two-year term with no renewal to consider, the $6,000 asset is amortized evenly over that same two years. Expensing the full commission immediately upon signing would defeat the purpose of capitalizing it at all, since the entire point of recognizing an asset is to match the cost to the pattern of revenue it helped generate rather than to expense it at once. Tying the amortization period to a generic sales-force compensation policy ignores the standard's requirement that the period track the specific transfer pattern of the specific contract's goods or services, not an unrelated internal compensation benchmark. A flat five-year period is not a rule found anywhere in ASC 340-40; there is no standard default amortization period for these assets, only the requirement that the period follow the actual transfer pattern of the contract at hand.
Source: FASB Accounting Standards Codification: ASC 340-40-35-1, Other Assets and Deferred Costs — Contracts with Customers