This is a guest blog post by Xactly VP Corporate Controller, Dan King, focused how to improve ASC 606 commission accounting compliance efficiency.
Since its implementation, ASC 606 (IFRS 15) has completely changed the way organizations capitalize the incremental costs of obtaining a contract. For any company with a sales team, this equates to accounting for sales commissions. These costs must now be capitalized on your balance sheet and amortized over your estimated customer life.
Initially, the standard has been focused on revenue recognition, but many accounting teams—both big and small—are finding that the process to capitalize commissions is no easy task. In fact, it’s much more complex than we all originally thought.
The Biggest Commission Accounting Hurdle—Manual Processes
ASC 606 requires detailed sales commissions data at the individual rep, customer, and contract-level. Unfortunately, more than 75% of organizations continue to rely on spreadsheets or other manual homegrown systems to manage their commissions data, forecasting, and sales planning.
The problem with manual spreadsheets and homegrown systems is that they simply are not designed to handle the complex needs of commission accounting. In fact, spreadsheets create an even bigger problem for finance teams—imprecise and inaccurate data. Not to mention, they only decrease your overall operational efficiency.
According to the 2018 Sales Compensation Administration Best Practices Survey, 80% of spreadsheets contain at least one error. For commission accounting, this is even more concerning when you consider that more than 80% of companies struggle with compensation errors.
So long story short—if you’re relying on spreadsheets or other manual processes, inaccurate data poses a huge risk to your organization.
If you can’t guarantee commissions data is accurate, then you can’t ensure that your commission accounting entries are accurate. If your forecasting and sales plans are housed in spreadsheets as well, then you can’t guarantee they’re based on accurate data.
When you consider that spreadsheets also can’t provide you with version control or a digital audit trail, the risk significantly grows because inaccurate data means you can’t guarantee that you are audit prepared.
Manual spreadsheets and homegrown incentive compensation and commission accounting systems create a second problem for your company—inefficiency.
Using manual processes, the average compensation administration team takes more than five hours per month to compile the necessary data and up to 6 weeks to complete commission payouts. That means your team is waiting just as long for data to create adjusting entries for commission accounting.
In addition, because both your compensation administration and ASC 606 commission accounting processes are manual, you’re using up to 50% more internal resources to complete these jobs each month.
The Impact of Commission Accounting Automation
Cost capitalization under ASC 606 is already complex because of data needs, cost capitalization, and determining the appropriate amortization schedule. As a finance leader, you don't have time to worry about inefficient processes or inaccurate data.
Automating commission accounting and commission expense accounting processes solves this. When you also automate incentive compensation, you create a single source of truth for your entire organization—which is data your entire organization can use for more accurate sales planning and forecasting. It’s a win-win for everyone.
Accurate Commissions Data
With an automation tool, commissions are automatically created, which provides the level of detail you need and you can be confident that your data is accurate. According to the 2018 Sales Compensation Administration Best Practices Report, your compensation admin team also eliminates more than 90% of errors and can complete payout efficiently in less than 3 weeks with automation.
Efficient Commission Accounting
With an automated commission expense accounting tool, you can pull data directly from your incentive compensation tool to automatically create journal entries, reducing the time it takes to reconcile from days to hours (You can learn how two companies were able to do this in our recent webinar). On top of increased data integrity and efficiency, you also gain the visibility of a digital audit trail, so that in the event of an audit, your team is prepared.
Next Steps for Efficient Commission Accounting
Commission accounting is complex, but it doesn’t have to be. You know your accounting team has the basics covered, but with manual processes, your team is wasting resources and time—both on the accounting and incentive compensation sides.
Automation sounds like a big step, but the impacts are worth it. I’ve seen it firsthand implementing it at Xactly. That’s why I put together a guide, “Cost Capitalization of Commissions Under ASC 606” to share best practices and everything you need to know about commission accounting. Download your copy today!