Key takeaways
- Commission paid on closing a sale is an incremental cost and must be recognised as an asset under TFRS 15 paragraph 91
- Present it as a contract cost, separate from construction WIP, and amortise it when the condominium unit is transferred
- Sales team salaries are not incremental costs, but commission paid on closing a sale is
- The practical expedient applies only when the amortisation period is no more than 1 year
1. Principles under TFRS 15
TFRS 15 paragraphs 91–94 set out the principle for costs of obtaining a contract: incremental costs that an entity incurs to obtain a contract with a customer, and expects to recover, must be recognised as an asset rather than expensed immediately.
Commission paid to external sales agents is a directly incremental cost, because the entity would not have to pay it if no sale took place. It therefore meets the conditions for recognition as a contract cost asset, separate from construction costs.
2. Account structure for condominium projects
The account structure should clearly separate cost types. The following codes are examples.
| Account code | Account name | Cost type |
|---|---|---|
| 11010 | WIP – Land | Land, transfer fees, taxes and survey costs |
| 11020 | WIP – Hard Construction | Main Contractor, Foundation, Infrastructure |
| 11030 | WIP – Soft Costs | Architecture, Design, Engineering, PM Fee |
| 11040 | WIP – Borrowing Costs | Interest during construction (TAS 23) |
| 11050 | Contract Cost Asset – Costs of Obtaining Contracts | Agent commission, sales referral fee (TFRS 15 paragraph 91) |
| 11060 | Contract Cost Asset – Costs of Fulfilling Contracts | Qualifying costs to fulfil a contract (TFRS 15 paragraph 95) |
3. Journal entries
3.1 When commission is paid or accrued
Dr 11050 Contract Cost Asset XXX
Cr 21000 Accounts Payable / Cash XXX
3.2 When the condominium unit is transferred and revenue is recognised
Dr 50134 Commission Expense – Outsource XXX
Cr 11050 Contract Cost Asset XXX
Amortisation must be systematic and consistent with the pattern in which goods are transferred to the customer, in accordance with TFRS 15 paragraph 99. For condominium units where revenue is recognised at a point in time, the full amount for that unit is amortised on the transfer day, not according to the percentage of construction completed.
If a contract is cancelled and the entity does not recover the commission, the asset for that contract must be written off as an expense. It should also be tested for impairment under TFRS 15 paragraph 101 when the recoverable amount falls. A per-unit amortisation schedule should be prepared to support this.
4. Recommended chart of accounts
| Account code | Account name | Type | Reference |
|---|---|---|---|
| 11050 | Contract Cost Asset – Costs of Obtaining Contracts | Asset (BS) | TFRS 15 paragraph 91 |
| 11060 | Contract Cost Asset – Costs of Fulfilling Contracts | Asset (BS) | TFRS 15 paragraph 95 |
| 50134 | Commission – Outsource | Expense (P&L) | Recognised on amortisation on the transfer day |
| 50004 | Sales Staff Compensation | Expense (P&L) | Salaries and other costs that are not incremental |
5. Key points to consider
5.1 In-house sales staff and external agents
Ordinary salary or bonus
Paid even when no sale takes place, so it is not an incremental cost and is recognised as an expense in the period
Commission paid on closing a sale
Whether paid to an external agent or an employee, if it is paid only when a sale is successfully closed, it is an incremental cost and is recorded in account 11050
5.2 Practical expedient (paragraph 94)
The standard permits immediate recognition as an expense if the amortisation period is no more than 1 year. For projects that sell several years before transfer, this expedient usually does not apply, but contracts closed close to the transfer day should be assessed.
5.3 Effect on cost tracking
In the project cost tracker, commission should appear in account 11050 on the statement of financial position, not as an expense in the income statement, until the condominium unit is transferred. It must be kept separate from the WIP used to calculate cost of sales per sq m.
This article refers to TFRS for publicly accountable entities. Entities that use TFRS for NPAEs should check the requirements of that framework.
6. Conclusion
Correctly classifying commission and costs of obtaining a contract directly affects the accuracy of the financial statements, financial ratios and the measurement of each project's profit. The accounting team should separate accounts by cost type, prepare an amortisation schedule that matches actual transfers, and make the disclosures in the notes required by the standard.