4 Things to Know About the Revenue Recognition Requirement Changes
Recently, we hosted a webinar focusing on the new requirements for accounting that will impact how companies manage commissions in the future. Steve Giusti, VP Corporate Controller and CPA at Xactly shared some insight with viewers, along with Caitlin Steel, Director of Product Management at Xactly.
First, why is this change happening?
Historically, the United States and other countries have differed in their accounting standards as well as financial reporting requirements. This has made comparing results across major financial markets exceedingly difficult.
For many years, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have been taking action to help converge how entities from around the world account and report revenue. Now, new standards are taking effect around accounting for revenue and the costs specific to obtaining them.
What are these changes all about?
Simply put, the new standard requires US GAAP based companies with revenue to reevaluate their recognition methods under different criteria.
While there is lots of discussion around changes to revenue, there hasn’t been much talk about the change on the costs of obtaining a contract. The primary incremental cost of obtaining a contract is the commissions incurred for that additional contract. As it stands now, it appears that the new standard will require the incremental costs of a contract be capitalized at inception and expensed systematically.
Currently, a company can expense their commissions as a period cost or over the life of the contract, as long as it is on a consistent basis.
The new rule requires that a company:
- Track the direct and incremental costs for each revenue contract
- Capitalize these costs as an asset
- Determine the expected amortization period and record the amortization expense over that term.
If you have other questions about revenue recognition not answered here, feel free to contact us or view our revenue recognition accounting standard resources.
How does this affect me?
Going forward, your company will likely need to extend the capture and reporting on commissions to ensure they can determine:
- The term of the contract, and how any given commission in the customer relationship benefits your company as the seller
- The right amount of time over which to amortize the expense
- The impact of all commissions paid
Most of you who are involved in the commission planning and administration will be required to work closely with your Accounting teams in the future. You’ll likely be asked to take on more responsibility to help meet these requirements and will need to exercise judgment when it comes to determining commission accounting methods.
When will this take effect?
Public entities are expected to comply with the new standards for annual reporting periods beginning after December 15, 2017. Other companies will be expected to comply a year later.
Many organizations will need to show the impact of the changes for two years prior, to help readers of the financial statements understand the impact – meaning they will need to apply the new rules to 2016 and 2017 reporting periods!
If you’d like to hear more detail regarding the impending changes, download the part one webinar presentation. Be sure to tune into the second webinar in our series about what to look for to meet the new Accounting Standard. If you have additional questions, visit our revenue recognition principle FAQ or revenue recognition accounting standard resources.