Managing Your ASC 606 Implementation
We recently hosted a WorldatWork webinar regarding the new commission accounting requirements under ASC 606. From the number of attendees and questions received during the webinar, this is a hot topic for both private and public companies that want to remain GAAP compliant. In fact, we got so many questions during the webinar that we couldn’t answer all of them during the allotted time – so we’re answering them here in this post.
However, I’d like to start by re-emphasizing a few key points:
- You should be working with the finance team to discuss the model that will be used for the treatment of commissions.
- Your company should be working with your external auditing team or other financial consultants to discuss the appropriate treatment of your revenue from contracts with customers and associated expenses (such as commissions).
- Xactly can help. We’ve posted links to many different resources here and also have an end-to-end solution, Xactly Commission Expense Accounting (CEA) to help companies meet the new commission accounting requirements under ASC 606.
Commission Expense Accounting Under ASC 606
DOES IT AFFECT ME?
Q: Is there any difference in accounting treatment if your sales “incentive” is a bonus structure (vs. commission as % of revenue) tied to % attainment of goal?
A: Yes, there can be a difference. Certain types of variable compensation, i.e. bonuses paid solely for the attainment of individual goals or professional performance, can be simply expensed. However, if you’re paying a bonus or commission related to securing or retaining customer revenue and there is a long-term business benefit (from renewals, additional services, etc.…), then you need to capitalize and amortize the expense. The key question to ask is, “Are the bonuses directly attributable to identifiable contracts?”
Q: What if the service you provide includes software and personnel (i.e. health records, retrieval/scanning, coding, etc.…
A: Regardless of what service you’re providing, you need to look at if and how you’re paying commissions to employees on the sale of those products and services. If you’re paying commission to incent reps to acquire or retain new customers, you’re paying for the acquisition of the customer, and you need to track the associated commissions at the contract and product level, and then be ready to feed that data into your amortization model.
Q: If your plan isn’t based on specific rates for specific products, is there an impact on approach here?
A: No, the approach remains the same regardless of whether incentive plans are or are not based on specific rates for specific products. The priority is figuring out whether commission payments can be instantly expensed or if they need to be amortized over a longer period of time based on the customer or product lifetime.
Q: What if a certain population of sales isn’t necessarily recurring or doesn’t require any services to be delivered beyond 12 months? Do you still need to defer the initial sale to each customer?
A: You will want to review the performance obligations in the contract with your financial team and auditors to determine whether or not you can simply expense the costs immediately.
Download our "ASC 606 Guide: Checklist for Managing Commissions," to learn what your business needs to do to manage commissions under ASC 606.
Q: What is the impact when the seller finances the product or sale?
A: In terms of the commission expense accounting, how the product or solution was paid for has no bearing. You still need to account for commissions being paid to anyone in your organization under the new rule, i.e. capitalizing commissions at inception and then expensing them in a systematic way as you provide goods or services to the customer.
Q: Are there any changes that need to be made to the payout of commissions that employers should be considering?
A: You must have a way to effectively track and record commission payouts. Companies need a system able to capture and report on the commission payouts to a much greater level of detail – at the customer, contract, product, and rep level. So, businesses need to consider if their system can access all of this data required for GAAP-compliance. Additionally, you need an audit trail able to extend out to the source data of compensation and commissions.
WHAT DO WE NEED TO AMORTIZE?
Q: How might this apply for a sales incentive plan where incentives are not earned until after reaching a threshold level?
A: This is a good question for your auditing team, as it depends on how your incentive plan is written. You might only need to capitalize and amortize just the incentives for the contracts after the threshold is met – but again this is one that you need to review. This issue is covered in detail under Issue 5 “Should commission based on achieving cumulative targets be capitalized?” in this IFRS and FASB staff paper.
Q: For an insurance company that pays a broker a commission on a whole life insurance policy, would you capitalize the commission and then amortize it over the life of the policy (which could be many, many years)? How would you treat an auto or home life insurance policy annual renewal commission?
A: ASC 606 states that contracts within the scope of ASC 944 (financial services and insurance) are excluded from ASC 606. If you currently follow ASC 944, there will be no changes. If not, then ASC 606 applies. In that case, a company might evaluate the average customer lifetime for their insurance policy (average time between purchase and payout) as the basis for their amortization methodology. But, as pointed out, that could be many, many years.
Q: What happens if the timing of a sales rep’s commission payment differs from how finance records revenue and expense of the sale?
A: The timing of the actual payment to the sales rep is not the trigger. That is separate from how the company capitalizes and amortizes the expense.
WHAT ABOUT CONTRACT TERMS?
Q: If quota and commissions are paid based on ACV vs. TCV, does the expense still need to be amortized over term of contract (i.e.: 3 years)?
A: Even if quota attainment is measured and commissions are paid at the start of the contract (regardless of whether it is based on ACV or TCV), the actual capitalization and amortization model will depend on the contract, products and services, performance guarantees, etc. The timing of the payment of commissions and the amortization of the commission costs are two different things. One is pay out relative to a sales compensation plan, and the other is based on the FASB accounting standards.
Q: For something like a hosting sale, does this mean we need to separate out the initial setup versus the on-going annual hosting fees? Do you have a perspective of how granular we are talking about?
A: In evaluating your commissions, you need to understand what you’re paying for, i.e. are you paying the sales rep commission for anticipated additional revenue from annual hosting fees? Alternatively, perhaps you pay a customer service rep a commission for securing the annual hosting fee. In that case, how you amortize the commission expense should be based on the lifetime of a customer, as agreed upon with your auditors.
Q: We have a commission plan for selling services to corporate clients – percent of revenue for a commissionable period. A sales person can get a higher commission rate for selling a longer contract term. Would that incremental difference paid in commission rate need to be expensed separately?
A: The whole amount of the commission paid in obtaining the contract would need to be capitalized over the longer timeframe, not just the incremental commissions.
HOW XACTLY CAN HELP
Q: Is Xactly already setup to handle ASC 606?
A: Yes. Xactly Commission Expense Accounting (CEA) solution provides companies with detailed commission data required to account for commissions under ASC 606. Xactly CEA automates the tracking, recording, and reporting of commission transaction details for GAAP compliance. Further, many companies make changes to commissions that require Prior Period Adjustments. Xactly’s Prior Period Adjustments functionality enables companies to simplify and automate the manual processes often associated with changes that impact historic incentive calculations and automatically updates the data tables for adjustments as needed. All of this includes a complete audit trail for any and all aspects of incentive payment calculations. Contact us to learn more.
Q: How does Xactly CEA integrate with our existing finance systems?
A: Xactly CEA fully automates data into your ERP or revenue management systems, providing more flexibility and choice to your business. Additionally, Xactly integrates with CRM, CLM, and CPQ systems to ensure the correct data is used for all calculations and reports.
Many companies incorrectly think that this part of the standard doesn’t apply to them. But – unless you’re selling a one-time POS product or service – it will likely impact how you must account for commissions. If you missed the webinar, you can still view it on-demand from WorldatWork.
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.