3 Ways ASC 606 is Challenging for Subscription-Based Businesses

subscription business ASC606
Leap the Pond
Leap the Pond
In Revenue Recognition (ASC 606)
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The new ASC 606 Standard is impacting organizations on various fronts. For many companies, it will change the way your accounting team accrues commission expenses, requires adjustments to sales compensation plans, evaluates revenue, and handles contracts. ASC 606 will give investors a streamlined picture that is more easily comparable across multiple industries.

Subscription-based businesses are arguably the most impacted by the new standard. Especially if they have commissioned-based employees and complex sales compensation plans. In addition, subscription-based business contracts tend to be more complex because they are not one-time, short-term transactions. Rather, they are long-term transactions with a focus on recurring customer relationship models.

As a subscription business becomes more successful, the more change that they can expect in their business. Customers add subscriptions, change subscriptions, products change, etc. It also leads to more complex accounting – especially under ASC 606. There are many teams involved in a single customer relationship. Therefore, cost-accounting for each customer lifecycle is more complex.

Download the Executive Summary "Commission Expense Accounting under ASC 606 (IFRS 15)" to learn how to prepare for and implement the new standards.

Three ways ASC 606 is challenging for software and technology companies:

  1. Increase in data volume
    One of the most overlooked implications of amortizing commissions for subscription businesses is the explosive growth of data volumes. The amount of data that the new standard introduces will make it practically impossible to manage commissions manually. For example, a detailed amortization schedule could be required for every person that gets compensated on every performance obligation tied to every contract a business engages in. 
  2. Difficulty maintaining consistent month-end close processesBecause organizations will need to capitalize and amortize their commissions to comply with the standard, it will become difficult for organizations to meet their already aggressive month-end close deadlines without the help of additional resources. It has been estimated that organizations using a manual solution to manage commissions will require an additional 1.5 resources just to support the commission accounting process changes tied to their month-end close.
  3. Any change affects the sales valueAny change to a customer characteristic can affect the value of an associated sales event. This means that under the new standards, companies are no longer only reporting on the state of the accounts receivable, but also the state of the companies themselves.

In addition, the new ASC 606 standard requires organizations to house all customer transactions under one single contract. This can be problematic for software and technology companies because they might have several contracts (subscriptions) with one customer, especially if the organization has been around for more than 10 years. This can be an overwhelming process. Ideally, your accounting system should be “contract aware” so that contract management capabilities are built in.

ASC 606 Are You Ready? Next Steps.

As ASC 606 continues to make headlines, have you prepared your company for the changes? A couple of months ago, CPA Practice Advisor reported that nearly 70% of respondents were not. Companies were either still addressing how they would implement the new standard, or worse, they haven’t thought about it at all.

In order to automate the commission accounting process under the new revenue recognition standards, you need to factor in four key elements into your strategy:

  1. The sales performance management solution needs to be fully integrated with the revenue management solution to consolidate the current and future revenue streams.
  2. The compensation plan designer needs to be flexible enough to handle all of the customer-facing teams. This includes compensating on financial and non-financial metrics.
  3. As events occur in the revenue management system, they need to trigger the downstream compensation calculations, including adjustments, all in an automated fashion.
  4. The sales performance management solution needs to funnel all of this upstream information through a set of compensation accounting rules to apply the appropriate treatment both during the transition and after the new revenue standards have taken effect. 

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3 Ways ASC 606 is Challenging for Subscription-Based Businesses

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