Our salesperson left the company. Commissions previously paid to him were recognized into expense over the sale period as the related revenue stream. However, once he left the company, do I recognize all the remaining prepaid commissions into expense, or do I continue to expense over the course of the revenue stream? He does not have to pay back the commissions paid to him, even if the customer requests a refund. Thank you in advance for your help.
Sales commission expense - recognition when employee terminates employment
Answers
Anon,
Interesting; I've always recognized the expense up front*. The two reasons (for me) for doing it your way is matching, and reflecting ongoing servicing of the account during the period over which you recognize the revenue. I personally feel the latter one is the more important one. If there was no work being performed, and you were just matching...I'd leave it as - is, as there really has been no change. If there is going to be a requirement that someone service those accounts...I'd recognize the expense immediately.
KP
*personal preference that avoids annoying conversations with the auditors and weird
I also follow the matching principle and key it to the duration of a customer's legal obligation to pay the company revenues for whatever the sales person sold. If sales commissions paid upon signing a customer are based upon a guaranteed (i.e. proposed noncancellable over some defined minimum period of time) contractual agreement's revenue stream, I spread it over that period of time. If the sales person leaves the company and the customer is still obligated as before, there's no trigger event to accelerate the amortization of that Prepaid Sales Commission expense. If the customer prematurely terminates or defaults upon the contract before that minimum initial contractual term, that's the appropriate trigger event for recognizing any and all remaining expenses associated with the customer / contract.
Diane White,
1
Thank you both. Very helpful.
Filed Under:
Human Capital