Sales Compensation & ASC 606
The ASC 606 is an International Accounting Standards Board (IASB) revenue recognition standard that introduces a structured way of reporting business earnings from contractual services. This standard requires businesses to recognize revenue based on the distinct deliverables outlined in a contract. Moreover, the pricing of these performance obligations, whether they are goods or services, must be captured in the contract while at the same time reflecting the value of money with respect to time.
Income from such contracts is to be recognized as the supplier meets their obligations to the client. However, if the deliverables are not fulfilled within the stipulated time, they can be deferred to a future date. This standard came to effect on December 15, 2017, for public businesses, while all other companies are to adopt it after December 15, 2018.
How will the ASC 606 affect businesses?
While the ASC 606 comes to streamline revenue requirements and establish a robust framework for tackling any issues that may arise with contractual sales, implementing it may not be a walk in the park. This is because the financial systems of most companies are not built to use contracts as the primary references for revenue recognition. Therefore, aligning current accounting systems to comply with the ASC 606 standard will have a huge impact on businesses as explained below:
1. Computation of commission based sales compensation
In complex transactions where multiple salespeople are involved in closing a contractual deal with a client, how each of these employees is compensated must be captured in the revenue recognition report. Now, this might seem like a non-issue but for a subscription-based business with a large customer base, it’s a nightmare. The size of data that needs to be processed under the new standard is huge and cannot be handled manually. It, therefore, goes without saying that companies will find it hard to compute monthly commissions for their salespeople if they don’t rely on automated solutions.
2. Additional reporting requirements
Essentially, the ASC 606 changes the characteristics of a customer to a business. This has a ripple effect on how transactions are handled and consequently, the value of sales. This means that businesses will be required to make proper disclosure of the value of sales and state of accounts receivable.
3. A single contract for all customer transactions
Another significant requirement of the ASC 606 standard is that all transactions with a customer must be anchored on a single contract. Now, this may not be the case with many businesses where multiple contracts exist for different products or services offered. Moreover, these transactions are likely to be handled by multiple sales reps. For such businesses to align their transactions with the new standard, it may require a complete overhaul of the existing accounting systems that are contract-centered.
How to prepare for the change
In order to comply with the ASC 606, companies need not wait until the deadline catches up with them. No one wants to taint their reputation by non-compliance with financial standards. So, here are infallible tips to give you a head start:
1. Integration of sales compensation software with contract-based revenue management system
Since all revenue reporting and consequently, computation of commissions, will be contract based, it’s only logical that you integrate your sales compensation software with your core revenue management system. The system parameters should be set such that any changes in the transactions will automatically trigger computation of respective commissions. This kind of setup eliminates the need for manual interventions thus reducing the required manpower.
2. Adopt a flexible compensation model
When choosing a sales performance management system, make sure that it’s built to accommodate all reps in the selling process. It should also be flexible enough to accept both cash and non-cash incentives.
3. Manage the transition period
One of the challenges that a company may face is lack of continuity in information flow once they are fully ASC 606 compliant. This can lead to cases where the company runs parallel systems to cater for queries relating to the period before compliance. To avoid this, businesses can opt to create accounting settings in their revenue and sales performance management systems to apply compensation computations appropriately for periods prior and after implementation.
The ASC 606 standard is bound to impact sales compensation calculations. Consequently, companies will now require commission management systems integrated with fully automated core revenue tracking software. This way, any changes in customer transactions will automatically trigger calculation of commissions while upholding the one customer-one contract rule. Besides, the right compensation system should give detailed reports to support the audit needs of the accounting department in light of new contract rules.