Legislation is commonly associated with red tape, and more often than not, it is seen as a burden. Businesses spend vast amounts of time educating staff on new regulations and even longer working through the operational changes required to comply.
At the beginning of 2018, IFRS 15 (ASC 606) came into play, changing the way companies account for their revenue with customer contracts. Essentially, IFRS 15 affects how companies manage their commissions and the costs related to obtaining a contact. So how is IFRS 15 different from other legislation, and why should your business pay attention?
For one, the new legislation has already had a significant positive impact for some companies. Just a few weeks after the new legislation came into force, it was reported that Park Group will no longer have to report "pass through spend," resulting in greater margins for the company.
For others the benefits will take a little more time to surface, but they are still there to be found. What IFRS 15 offers is the opportunity for every business to unbundle its contracts, review the sales commission paid on each deal, and assess the true ROI of each and every sale. So what steps can you take to ensure your company is compliant?
Review Every Element of a Contract
IFRS 15 is requiring businesses to review every contract piece by piece to understand the profitability of each element and the cash flow at any one point. This can of course vary greatly from contract to contract depending on when revenue is recognised and when costs are incurred. Having a clearer view of this means finance teams have much better visibility of the overall financial health of the organisation.
Optimise Commission Structures
In addition to this, IFRS 15 offers a chance to take a look at your sales commission. Because of the need to attribute each payment to a sale, the impact of each commission payment will become far clearer. This means the finance team can truly understand the impact of each commission plan on the bottom line, not to mention the clear audit trail that will be left as a result.
Re-educate and Get Buy-in
This review and the increased visibility mean it is the perfect time to re-educate and get buy-in from all parties, including sales, to the commission structure. Armed with tangible examples and data from previous deals, the thinking behind any changes to commission payments can be explained. If the legislation has shined a light on areas that were previously underpaid and this is rectified, then this will come as welcome news to a hungry sales team.
On the other hand, if some areas just aren’t as profitable for the company, having the ability to show them why and focusing their targets elsewhere should go down a little better. To some, this might seem a huge step, but with the right tools in place and a fully formulated project plan for each department or package sold, progress will be made.
By taking a fresh look at commission and revenue recognition, not only will you be ensuring that your sales and commissions are fully compliant with the new regulations, but you will also have a clearer, more holistic view on exactly where to focus your efforts to grow the business. At Xactly, we want to make IFRS 15 compliance easier for our customers.
Learn more about Xactly's acquisition of Obero and their IFRS 15 / ASC 606 compliance programs here.