Commission Expense Accounting: 5 Steps to Simplify ASC 606 Compliance
By now, most companies have implemented and adjusted accounting processes to meet the requirements under the new revenue recognition standards known as ASC 606 (IFRS 15). As a result, commission expense accounting practices have changed, requiring extremely detailed commissions data.
While most companies have navigated through the initial transition and implementation process, the deeper companies get into managing commissions data under the new standards, the more challenging the path to compliance appears to be.
The Main Challenges of Commission Expense Accounting
Ultimately, commission expense accounting has created two main challenges for organizations—both of which revolve around data. First and foremost, companies must uncover the data they need at a detailed level. This directly impacts compensation administrators and their ability to meet data needs.
Under the accounting standards, data must be compiled at a detailed level to help establish accounting estimates around the life of the customer, and to manage the amortization to ultimately create the journal entries accounting needs to comply with ASC 606.
The biggest challenge ASC 606 commission expense accounting requirements present is how to best manage that data and the resulting journal entries needed for compliance. Of course, all these pieces must be consistent, reliable and ultimately, auditable. Unfortunately, more than 80% of companies continue to use spreadsheets to manage commissions data—and this is proving to only increase the challenges.
5 Steps to Solve Commission Expense Accounting Challenges
In order to achieve ASC 606 compliance more easily, companies must find ways to gather and manage their commission data more effectively and efficiently. To help you simplify your commission expense accounting processes, here are five steps to solve these common challenges.
1. Wean Your Team off Spreadsheets
Let's cut to the chase: 80% of spreadsheets contain errors—and unfortunately, more often than not, human error is to blame for inaccuracies in manual data management. Not to mention one wrong character in your spreadsheet formula and all of your calculations will be thrown off. This impacts your forecasting, planning, and ultimately, your ability to drive growth and revenue.
Consider the amount of data your team manages just to calculate commissions. Now triple the amount of detail you need to manage to effectively create journal entries for commission expense accounting. This often requires data detail at the customer, contract, and even individual rep level.
On top of that, under commission expense accounting (and for businesses to ultimately be successful), your data needs to be accurate—and that's not something spreadsheets can realistically provide.
2. Prioritize Data Accuracy and Accessibility
Data is a crucial part of commission expense accounting. As we mentioned in the point above, spreadsheets can provide the accuracy you need. You need it at a detailed level, but more importantly you must be able to access data and be confident that it is accurate. To do this effectively, creating a central source of truth is key. More often than not, this comes in the form of automating incentive compensation management.
Once data is all in one place and easily accessible for all teams, you can start identify data gaps across all organizational functions, including sales planning, forecasting, and performance analysis. Outline the reports that accounting needs to comply with ASC 606, and then pull in the sources to ensure that data is easily accessible.
3. Automate Compensation Administration
Like we mentioned above, the easiest first step to creating a central source of truth and data is by automating incentive compensation. Because commission payouts pull from the same data used to create journal entries under commission expense accounting, this ensures data matches and is accurate.
Plus, companies that automate compensation administration processes see additional benefits, including:
- Up to 99% payout accuracy
- 100% payouts completed in less than 3 weeks
- Up to 172 hours of admin time saved in one month
(In fact, Cox Automotive was able to do just that. Read more about their story here).
4. Design Simple, Yet Effective Incentive Plans
Studies show that sales compensation plans with less complex incentives have higher ROI. The main reason? Both sales reps and compensation admins understand how it works. When incentives become too tricky, it can be confusing for reps to understand what's expected of them. And it also makes it harder for comp admins to calculate pay accurately—especially if compensation is managed in error-prone spreadsheets.
When incentive plans are simple—and also aligned with corporate objectives—they are more effective. When these are executed in an automated incentive compensation platform, the data can be automatically compiled at the level of detail needed for commission expense accounting.
5. Invest in Commission Expense Accounting Tools
As we've mentioned more than once above, spreadsheets and manual management of commission expense accounting data is ineffective. Commission expense accounting tools can help pull this data directly from your incentive compensation management (ICM) platform and automatically create journal entries.
Because the entire process is digitized, you automatically create a digital audit trail and can track all changes to ensure accuracy. Ultimately, this maximizes efficiency, saving both time and resources. (See how Xactly's Commission Expense Accounting compares to traditional ERP systems in this guide).
Achieving Simplified Commission Expense Accounting
As your company grows and scales, the amount of data needed for commission expense accounting and the challenges associated with ASC 606 compliance will only increase. Luckily, with the right tools, organizations can maximize efficiency and ensure their data is accurate for compensation payouts and commission expense accounting—killing two birds with one stone.
Want to learn more about how you can achieve simplified commission expense accounting? Watch a quick demo of SimplyComp—the first DIY compensation tool.