ASC 606 and QCommissionKnown as ASC 606 – Revenue from contracts with customers, these accounting standards layout guidelines for revenue processes such as contracts, quotes, orders, etc. This results in many companies needing to re-evaluate when and how they account their revenue and whether sales and its related expenses need to be booked differently.
ASC 606 breaks down the contract process into the following 5 steps:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price
- Recognize revenue when or as the entity satisfies a performance obligation
- Sales Commissions Tracking: Previously, keeping track of commissions at the rep level is enough. With the new standard, the transaction level as well as the customer level need to be tracked as well.
- Commissions Expense Timing: Previously, commission used to be tag as an expense when it was paid out. With the new standard, commissions need to be tagged as an expense over a time period matching the delivery of services to customers.
- Types of Commissions and Capitalization: Not all sales commissions/incentives qualify for capitalization. The pre-condition for capitalization is that associated costs should be ‘incremental’ and ‘recoverable’.
- Contract Duration and Amortization: The sales commissions should be amortized based on the entire expected duration of the contract (not just initial period). This requires an estimation of the average lifetime of the contract.
- Recognizing as Immediate Expense: Commissions for the contracts that have a duration of one year or less can be booked for immediate expense rather than as an amortization.