What is ASC 606?
Beginning January 2018, the jointly developed new revenue recognition standards by the FASB and IASB, will take effect. ASC 606 will impact American companies using the generally accepted accounting standards (US GAAP) and IFRS 15 will impact companies that follow International Financial Reporting Standards. The upcoming changes will dramatically affect accounting practices around revenue recognition and expense matching. Subscription-based businesses and businesses operating under long-life contracts will require superior attention to detail during accounting due to the complicated nature of these types of agreements and their potential for change.
How does it impact sales commission accounting?
ASC 606 will have significant implications with how companies report revenues and how they deal with the costs associated with acquiring new business. For example, commissions expenses will now have to be amortized over the length of the agreed upon contract. In the past, comp admins and sales operations could simply report the commission expense in the period in which it occurred. However, with the changes being implemented, they will now have to pay closer attention to both sales commissions and bonuses to remain compliant with the new accounting standards. This will effectively make manually tracking this type of data through basic spreadsheets much more difficult.
What are the challenges my organization might face?
As the looming deadline of January 1st, 2018 for public companies, and January 1st, 2019 for private companies draws nearer, organizations need to be cognizant of the new challenges related to contract acquisition costs; notably, sales incentives, with the revenue period present two separate challenges: matching and modifications.
Matching is the ability to line up the cost amortization schedule with the appropriate revenue recognition schedule. Generally, this means relating sales incentives paid with how the sales contract revenue stream will be earned. For example, if a rep is paid $3,000 for closing a 3 year evenly billed subscription, then your amortization schedule will look something like $1,000 per year. Matching is normally done at the contract level, but some organizations may pursue a portfolio-level analysis and match accordingly.
Modifications are an added layer of complexity introduced by the ASC 606 standard. With modifications, accounting teams need to consider the planned revenue stream versus the actual revenue stream. Changes in the revenue stream can be introduced through several contract variables, including:
- Performance obligations that could change what amount of revenue is recognized
- Usage, volume, and discount impacts to pricing
- Contract modifications, such as an early cancellation, an extension, or a contract revision
Each of these events could force a revision of the amortization schedule and have a measurable impact on cost accounting.
How can my organization meet these challenges?
Read Part II of our ASC 606 Series and learn how you can better prepare your organization for January 1st 2018. Of course, if you can't wait for the next chapter, book a meeting today with Intangent, we'd love to talk!