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If you’re responsible for your company’s accounting processes, you know just how complicated maintaining regulatory compliance can be. You’ve undoubtedly heard the buzz around the new ASC 606 (IFRS 15) standard. One piece of ASC 606 in particular probably stands out: the new standard changes how companies must account for their sales commissions.
This includes accounting for commissions at a much deeper level of detail and amortizing the costs over the customer’s lifetime. To comply with the new commission expense accounting requirements, you’ll need to act fast—but in order to make sure you’re working smarter and not harder, ask yourself these five questions first.
Will the ASC 606 changes affect me?
It depends. There is a popular misconception that the ASC 606 standard only applies to SaaS companies. While recurring revenue companies are certainly impacted, any company with contractual obligations to their customers are impacted. So, do you have current contractual obligations to your customers? If so, you fall under the new standard.
What dates do I need to know?
The deadline to comply with the ASC 606 standard for public companies has already passed—meaning if you work for a public organization and you aren’t 100 percent confident in your current compliance, there’s not a moment to waste.
While the deadline for private companies has not yet passed, it is rapidly approaching. The ASC 606 effective date for private companies in the U.S. is December 15, 2018. On that date, all private organizations with contractual obligations to their customers will need to be fully compliant with the new accounting standard.
What does the new standard require?
The CEA principle - called the “incremental cost of obtaining a contract” - changes how some organizations manage their accounting for sales commissions. While sales commissions represent the biggest and most obvious expense, these revenue acquisition costs can also include legal or contract arrangement fees and bonuses—basically, any expense that’s incurred by a company when they close a sale. To comply with the new commission expense accounting rules, companies must:
- Track direct and incremental costs for each contract
- Capitalize those costs as an asset
- Estimate the amortization period and record it over that term
What are my implementation options?
With the deadline right around the corner, time is no longer on your side. In order to gain ASC 606 compliance, you need to carefully consider your implementation options. These include (1) an ERP system, (2) subscription billing and revenue management software, (3) spreadsheets, or a (4) sales compensation management system. After reviewing the capabilities of all four commission management solutions, it’s clear that implementing a sales compensation management solution is the best way to ensure complete compliance with the ASC 606 (IFRS 15) standard.
It’s time to take action. You need to assemble your team and move forward quickly. There will be several more critical decisions to be made—including whether you adopt a full or modified retrospective approach—but by selecting your management solution and partnering with sales compensation experts, you can keep every step of the implementation process clear and manageable.
Xactly’s complete solution for compliance, Xactly Commission Expense Accounting (CEA), can streamline your financials, increase data accuracy and process insight, and of course, ensure regulatory compliance. Learn more about implementation and compliance, download this Ventana Research guide, Cost Accounting Under ASC 606.