Sales Commissions “Before and After” Revenue Recognition
Three months ago I hadn’t heard about Revenue Recognition. But, in my role on Xactly’s content team, I’ve gotten a fast education on the issue – particularly in regards to managing sales commissions. From what I’ve learned, the “before and after” requirements for commission processes under the new Revenue Recognition standard are vastly different.
To quickly recap, the Revenue Recognition standard updates U.S. financial reporting requirements to better align with how reporting is done internationally. Driven by the Financial Accounting Standards Board (FASB), it has been designed to converge the way that companies report revenue with a single, principle-based approach.
There’s been a lot of focus placed on the standard in general – but, not so much on how it changes commissions accounting through what’s known as “the cost of obtaining a contract.” To be technically accurate, it can also impact other types of contract costs, such as those incurred to bid or create proposals or even legal fees. However, the biggest impact by far is on commissions.
If your company pays commissions – and you want to stay GAAP compliant – this can apply to you. Here’s an at-a-glance “before and after” view of what’s happening with commission accounting:
Companies typically expense their commissions in two ways: 1) as a period cost at the time of sale; or 2) over the life of the contract. Either way works, as long as you’re consistent.
Incremental costs of a contract have to be capitalized at inception and expensed “systematically” as you deliver the goods or services.
Companies only need to aggregate payments to the rep level, and about 85% of companies do this on spreadsheets.
Companies need to account for commissions to a much higher level of detail. You can’t just aggregate to the rep level. You need to account for commissions to the customer and – most likely – the order level. This means that you need a lot more insight into transactions than you can get from a spreadsheet.
You probably capitalize the costs (along with associated payroll taxes) as contracts are closed.
You will need to capitalize the cost as an asset, requiring more judgments and estimates on the part of accounting – for example, regarding the expected customer lifetime.
Commissions are expensed at time of payment.
You need to expense commissions over time on a systemic basis that’s consistent with the transfer of goods or services to your customer.
Learn More Now From Xactly
Commission expense accounting just got a hundred times more complicated. To comply with the new regulations, you need to be sure that you can access the right data and have processes in place to deal with these changes.
Because there has been a shortage of information specifically on this piece of the Revenue Recognition standard, Xactly has compiled multiple revenue recognition resources for our customers and prospects about the changes around commission expenses. We invite you to take a look for immediate access to on-demand webinars, FAQs, and other content designed to help your business get a handle on this issue. Please check them out.
We’re already in the “look-back” period, so the time to put together a game plan for compliance is now.
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.