IFRS 15: What Impact has It Had One Month In?
We’re a month into 2018—crazy right? Many people will have taken their time getting back into the swing of things, but for some IFRS 15 has made for a frantic start to the year.
For those of you wondering what IFRS 15 is – it is essentially a new International Financial Reporting Standard (IFRS) which provides a new way of accounting for revenue on contracts with customers. It’s no small change either – it has been described as the “biggest change in accounting for 15+ years” by Salesforce’s Regional VP for EMEA.
The aim is to deliver more detailed and accountable information on revenue transactions, which in turn provides a truer and more transparent view of a company’s revenue.
IFRS 15 comes in five stages, which can be found in more detail here:
- Identifying the contract with the customer
- Recognising all the deliverables of the contract
- Confirming the amount to be transacted as a result of the deal
- Allocating the price of the performance obligations of the contract
- Only recognise revenue as transacted once the obligation of the portion of the contract is delivered
Essentially every contract a business obtains will need a clear path of performance obligations and the revenue associated with that.
So how is this affecting businesses?
It can go two ways. It has already caught out Capita, which will now need to phase revenue from its £135m TfL contract over a longer period. But for others such as Park Group, it has had a positive effect thanks to no longer having to report “pass through spend”, which has resulted in much higher margins for the business than previously thought.
Download the Executive Summary "Commission Expense Accounting under IFRS 15 (ASC 606)" to learn how to prepare for and implement the new standards.
What does this mean for your sales team and their commissions?
IFRS 15 has been introduced to produce a more accurate revenue accounting for businesses, and in turn, provide more financial security and stability. But as IFRS 15 directly impacts all costs associated with a sale, sales teams are affected too.
For example, previously a business would have been able to recognise the revenue of a two-year contract at the beginning of the contract, paying out the commission to the sales rep who signed the deal in their next pay packet. However, with the new legislation, companies have to recognise the revenue of the same contract over the two-year period instead.
But what sales person is going to wait around for their commission to be paid monthly over two years? It just isn’t going to happen, and even if they did, you’d want to pay them fast enough to encourage them to get on and sell more.
As a result, pressure could be put on the cash flow of the business.
Then there’s the need to actually track which deals relate to each commission payment – you can’t just run a broad quota system across the board where 10 sales results in £x commission.
This is, of course, going to prove to be a challenge for businesses.
To support such a detailed audit of a business’ sales revenue and commissions, the data is going to need to be much more granular to ensure you are compliant. But it will be beneficial as it will create a historical log of the entire contract, from the customer to the contract details and deliverables, costs of delivery, all the way to the sales rep who secured it, therefore making it easier to track the ROI of each deal.
With the right systems and tools, it can be simplified and be manageable. It can provide an integrated solution to capture, track, record, and report on commission data at the level required for capitalising commissions under the new IFRS 15 guidelines.
To read more, simply download our guide to IFRS 15.
Managing Commissions Under the New Revenue Recognition Standard
The vast majority of businesses are unprepared for commission expense accounting, more commonly known as the costs of obtaining a contract.