Contract costs under ASC 340-40

Capitalized commissions are often the largest contract cost for SaaS and subscription businesses, and the amortization period is where most of the judgment lies. This guide explains which costs ASC 340-40 capitalizes, how long to amortize them, and works an example where renewals extend the period.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

ASC 340-40 sets the US GAAP rules for contract costs that go with ASC 606. Incremental costs of obtaining a contract, mainly sales commissions, are capitalized if the company expects to recover them, unless the amortization period would be one year or less and the company uses the practical expedient. Costs to fulfill a contract are capitalized if they relate directly to it, generate resources used to perform it, and are expected to be recovered. The asset is amortized over the period of benefit, which can include expected renewals.

At a glance

Costs to obtain
Capitalize if incremental and recoverable
Main example
Sales commissions
Practical expedient
Expense if one year or less
Costs to fulfill
Capitalize if three criteria are met
Amortization period
Can include expected renewals
Impairment
Never reversed
Contract costs under ASC 340-40Costs to obtain: Capitalize if incremental and recoverable; Main example: Sales commissions; Practical expedient: Expense if one year or less; Costs to fulfill: Capitalize if three criteria are met; Amortization period: Can include expected renewals; Impairment: Never reversed.KEY FACTS AT A GLANCEContract costs under ASC 340-40Costs to obtainCapitalize if incrementaland recoverableMain exampleSales commissionsPractical expedientExpense if one year orlessCosts to fulfillCapitalize if threecriteria are metAmortization periodCan include expectedrenewalsImpairmentNever reversedChecked against official sourcesTax BakersContract costs under ASC 340-40Costs to obtain: Capitalize if incremental and recoverable; Main example: Sales commissions; Practical expedient: Expense if one year or less; Costs to fulfill: Capitalize if three criteria are met; Amortization period: Can include expected renewals; Impairment: Never reversed.KEY FACTS AT A GLANCEContract costs under ASC 340-40Costs to obtainCapitalize if incremental and recoverableMain exampleSales commissionsPractical expedientExpense if one year or lessCosts to fulfillCapitalize if three criteria are metAmortization periodCan include expected renewalsImpairmentNever reversedChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

Which costs to obtain a contract does ASC 340-40 capitalize?

Only incremental costs, those that would not have been incurred if the contract had not been obtained. Commissions paid to employees or agents for signing a contract are the main example, including payroll taxes on those commissions. Salaries, bonuses based on overall company results, and costs incurred whether or not the deal closes are expensed.

What is the one-year practical expedient?

A company may expense incremental costs of obtaining a contract when incurred if the amortization period of the asset would have been one year or less. Note that the test is the amortization period, not the contract term: a one-year contract that is expected to renew without a new commission may have a longer amortization period, so the expedient may not apply.

A worked example: capitalized commissions with renewals

A SaaS company pays a $36,000 commission on a three-year contract. No commission is paid on renewals, and customers like this one stay for five years on average. Because the commission relates to goods and services the company expects to provide over the whole relationship, it is amortized over 5 years: $7,200 a year.

Capitalizing and amortizing a commission ($)Capitalizing and amortizing a commission ($)Contract signed: commission paidDebitCreditDr Capitalized contract costs36,000.00Cr Cash36,000.00Each year: amortizationDebitCreditDr Sales and marketing expense7,200.00Cr Capitalized contract costs7,200.00
A $36,000 commission amortized over a 5-year expected customer relationship.

If the company paid a renewal commission commensurate with the initial one, the initial commission would relate only to the first contract and would be amortized over its three-year term.

How is the amortization period set?

On a systematic basis consistent with the transfer of the goods or services to which the asset relates, including specifically anticipated contracts such as renewals. Evidence includes customer retention history, product life cycles and expected technology changes. Many companies use the average customer life for the relevant customer group.

Which costs to fulfill a contract are capitalized?

If another Topic applies, such as inventory (ASC 330), property and equipment (ASC 360) or internal-use software (ASC 350-40), use it. Otherwise, capitalize costs to fulfill a contract only if they relate directly to the contract, generate or enhance resources that will be used to satisfy performance obligations in the future, and are expected to be recovered. Setup costs for an outsourcing or hosting service before it goes live often qualify; general and administrative costs and wasted materials do not.

How are contract costs tested for impairment?

An impairment loss is recognized when the carrying amount exceeds the remaining consideration the company expects to receive, less the costs still to be incurred. Under US GAAP, impairment losses on contract cost assets are never reversed; IFRS 15 allows reversal. See contract costs under IFRS 15.

Where do capitalized commissions appear?

As an asset, often called deferred commissions or capitalized contract costs, split between current and non-current, with the amortization usually in sales and marketing expense. Companies disclose the closing balances, the amortization and any impairment for the period, and the judgments made in setting amortization periods.

Where to go next

See how the related revenue is recognized in the ASC 606 five-step model and ASC 606 for SaaS companies.

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Questions people ask

What is ASC 340-40?

The US GAAP subtopic on costs to obtain and fulfill contracts with customers, which accompanies ASC 606.

Are sales commissions capitalized under ASC 340-40?

Yes, if they are incremental and expected to be recovered, unless the amortization period would be one year or less and the practical expedient is used.

How long are capitalized commissions amortized?

Over the period the related goods or services are transferred, which can include expected renewals if no commensurate renewal commission is paid.

Can contract cost impairments be reversed under US GAAP?

No. IFRS 15 allows reversal, but ASC 340-40 does not.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. FASB Accounting Standards Codification: Topic 606, Revenue from Contracts with Customers
  2. Financial Accounting Standards Board: Revenue recognition

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

ASC 606ASC 606 for SaaS and software companiesASC 606The ASC 606 five-step model with examplesIFRS 15Contract costs: costs to obtain and fulfil a contract under IFRS 15

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This guide is general information. It is not tax or legal advice for your situation.