Under the new ASC 606 (IFRS 15) standard, sales commissions associated with securing contracts need to be capitalized as an asset and amortized over the period the service is provided. Certain exceptions (e.g. service contracts lasting less than one year), sometimes called practical expenditures, can be expensed as the commission is incurred. It’s likely that understanding and responding to these regulations has kept many an accountant up at night—and finding the best solution to managing commissions under the ASC 606 can be daunting.
To comply with the new requirements, financial leaders typically turn to one of four options. These include (1) an ERP system, (2) subscription billing and revenue management software, (3) spreadsheets, or a (4) sales compensation management system. In order to determine which management solution is really right for the job, we’ll take a closer look at all four.
An ERP system should definitely be able to record aggregate compensation and commissions, but under the ASC 606—you’re going to need a lot more than that. More often than not, ERP systems are not designed to track all of the tiny (and critical) details of sales compensation. Customizing such a system to accurately track capitalized costs would incur a heavy financial burden along with other undue process complications.
That said, any solution that you select to manage your commission accounting processes should be able to easily integrate with your existing ERP solution.
Subscription Billing and Revenue Management Software Packages
Your subscription billing and revenue package can certainly be useful in helping to drive the compensation calculations for payout and accounting purposes. Unfortunately, when it comes to managing the actual commission calculations, this solution is extremely limited and will not be able to meet your complete accounting needs.
Don’t use a spreadsheet. You deserve better than that. Spreadsheets are wonderful tools for so many purposes—but managing commission accounting is not one of them. Spreadsheets are complicated and prone to errors. To comply with the new standard using a spreadsheet, accountants would need to create and maintain a waterfall for every individual contract. This process is time-consuming and opens you up to extreme risk the next time an auditor comes knocking at your door.
Sales Compensation Management Systems
We all knew where this was headed. The experts agree that a complete sales compensation software solution is the hero you need. Simply put, they’re designed specifically to handle complexities of accurately and consistently tracking costs of obtaining a contract and providing the necessary controls and audit trails to ensure compliance. They’re the most logical, reliable, and efficient way to manage commissions.
Xactly provides the most complete solution available on the market. Xactly Commission Expense Accounting (CEA) will ensure your commission accounting process is compliant under the ASC 606/IFRS 15 revenue recognition standard. CEA offers full capitalization and amortization support, a secure and accurate system of record, and an extensive report library.
Complying with the ASC 606 is necessary. Automating your compensation management and reducing time and financial costs? That’s the silver lining.
Learn more from the SVP and Research Director of CFO and Business Research at Ventana Research. Download “Cost Accounting Under ASC 606” for an in-depth look at the study’s recent findings.