We’re just over one full year into ASC 606 (IFRS 15) compliance for publicly-owned companies. For private companies, the journey is just kicking off. Either way, understanding revenue recognition (ASC 606) has proved more challenging than many organizations initially expected, and no two companies are handling the new standard exactly the same.
In a recent webinar, Xactly VP of Strategic Marketing and internal ASC 606 expert, Erik Charles discussed the impact of Revenue Recognition as well as how different companies are interpreting and implementing ASC 606.
A Brief History of Revenue Recognition
Under ASC 606 (IFRS 15), organizations must recognize revenue to “depict the transfer of goods and services to customers in an amount that reflects what the company expects to be entitled to in exchange for those goods or services.”
To put it simply, Revenue Recognition changes the way businesses recognize revenue for the costs of obtaining a customer contract. Rather than report revenue as a whole, companies must account for revenue as they complete performance obligations (aka their end of the deal). As a result, this has created a need for companies to obtain very detailed commissions data and audit trails.
The webinar confirmed one thing in particular: one year into Revenue Recognition, businesses are still working on the best way to manage compliance and adapt internal accounting processes. In fact, when polled on the status of their ASC 606 adoption, attendees were split, with close to half (48%) still in the earliest stages.
That being said, as companies start implementation and ultimately reassess their approach, the same challenges apply (read more on how companies are gathering the right data for ASC 606 here). It can be helpful to see how other companies and peers are interpreting Revenue Recognition.
How Companies are Approaching Revenue Recognition (ASC 606)
Regardless of where your company is at with Revenue Recognition adoption, organizations should still consider how to improve and simplify their compliance process. As guidance, here’s how top companies are tackling Revenue Recognition (ASC 606).
How are companies managing the amortization?
...the Group does not expect the application of AASB 15 to have a material effect on the consolidated net income, balance sheet, or cash flows of the Group. The Group has adopted this standard on 1 July 2018 using the modified transition approach.
Under current accounting, incremental costs to obtain a contract, such as directly attributable sales commissions, are capitalized in deferred expenditure and amortized on a straight-line basis over the average customer contract term.
...we have identified a net increase in these capitalized costs, due to a combination of factors. We have substantially extended the amortization periods for sales commissions paid on acquisition of the initial contract where these commissions are not commensurate with re-contracting commissions.
Therefore, the amortization period for the initial commissions reflects the expected customer life rather than just an initial contract term. This impact has been partly offset by adjustments for early terminated contracts and commissions related to short term contracts (i.e. one year or less) which have been expensed as incurred under the practical expedient allowed by AASB 15.
...commission expenses associated with new and add-on business be amortized over the expected life of the deployment, which we estimate to be five years...will be amortized over a period that is several years longer than the historical standard.
...capitalizing incremental costs of obtaining on-premise support contracts with the resulting assets to be amortized over the expected life (including anticipated renewals) of the support contract obtained.
...higher capitalization of sales commissions...net positive impact on operating profit.
What is the impact on expenses?
The requirement to defer contract acquisition costs, however, will result in the recognition of a deferred charge on our balance sheets.
...not only did Workday recognize more revenue for fiscal-year 2017 under the new accounting rules, it also recorded lower expenses.
What is the impact of renewals?
...under the new standard (commissions) will generally be capitalized and amortized over the period of contract performance or a longer period if renewals are expected and the renewal commission is not commensurate with the initial commission.
Full vs. Modified Retrospective Approach?
These new standards had a material impact on our consolidated financial statements. Beginning in fiscal year 2018, our financial results reflect adoption of the standards with prior periods restated accordingly.
Salesforce.com, Inc. yesterday revised its first-quarter and fiscal 2019 outlook reflecting the impact of the adoption of new Accounting Standards...using full retrospective method.
How You Can Get Started
For every company paying their sales team commissions, Revenue Recognition (ASC 606) adoption should be a top priority. However, it shouldn’t be a daunting, extremely difficult process.
Xactly Commission Expense Accounting (CEA) pulls commissions data straight from your incentive compensation management (ICM) solution to ensure data accuracy, making it easier to create a digital audit trail and manage accounting entries. Learn more in our CEA video below!