Top Audit Requirements for Commission Accounting Under ASC 606
Organizations are under pressure to prepare for the pending Revenue Recognition Standard ASC 606. If it weren’t already difficult enough, businesses that pay commissions have additional and even more complex requirements for compliance. Subtopic 340-40, also known as the “incremental costs of obtaining a contract,” transforms how companies must account for incentives and commissions under the new standard.
I addressed a few of the key issues in two earlier posts:
- 4 Ways CFOs Can Prepare for Commission Accounting Changes with ASC 606
- Estimating Commission Amortization with ASC 606
Below are other steps that organizations should take now in order to prepare for the new requirements for commission accounting under ASC 606.
Evaluate Your Incentive Plan
Since you’re going to need to track, record, and report on commissions at a much greater level of detail, you should look at the current state of your incentive plan. Take time to understand and evaluate your compensation approach. Are you incenting the right behavior with your sales commissions? Can you measure the ROI of your incentive compensation in driving performance?
You need a plan document in place that defines your policies and the timing of events in order to drive your audit approach. Different crediting elements will help you establish the requirements your system will need to track for the requisite audit trail.
Capture the Right Data
To support your audit documentation, be sure that your system can capture and report on all the data required to be GAAP-compliant. Businesses now need a much greater level of detail for sales and commission data – at the customer, contract, product, rep, and manager level.
With this greater detail, your audit trail has to extend out to the source data of compensation and commissions. Whether your organization has an ERP system and/or revenue management system, be sure that your incentive compensation management (ICM) solution can support integration for both. Any ICM solution should be flexible and able to work with either.
Document Your Approach
Documenting your methodology for compliance is essential to meet the audit requirements under ASC 606. To avoid the possibility of any implementation rework, be sure to work cross-functionally to implement your approach. In addition to your accounting and reporting team, this process typically should involve, your sales operations, IT, and, particularly, internal and external audit.
Get a Clear, Historical Audit Trail
For auditing purposes, organizations need a clear, historical audit trail, including when changes were made and by whom. If you’re relying on spreadsheets, this is difficult if not impossible to achieve. For accounting firms to rely on your internal controls, you must continuously evaluate who has access to those spreadsheets in order to ensure the proper control and security practices are in place and being followed.
With a modernized, cloud-based tool, you inherently have a better (and more secure) model to maintain information than a spreadsheet. For example, with an ICM solution, you can see what commission changes were made through automated and traceable change management – unlike a spreadsheet where you can’t see what it looked like five minutes back.
Moreover, having this auditable system of record should reduce the amount of detail testing required by an auditing firm. This dramatically simplifies your audit evaluation and lowers your costs.
Guarantee Data Integrity
In addition to the above, an automated tool increases your data accuracy and integrity. Research shows that over one-third of spreadsheet calculations have consequential errors. It’s easy for someone to “fat finger” the math in a spreadsheet – causing calculation mistakes that can cost corporations million of dollars.
As with any new standard, organizations can expect to be under a higher level of scrutiny with limited industry and accounting guidance. Both public and private companies who want a clean audit opinion will need to the have their systems and processes ready for ASC 606. Public companies who must satisfy the requirements of the SEC and private companies whose investors or lenders require GAAP financial statements should expect changes in the way they calculate their revenue and expenses starting as soon as next year. “Opting out” isn’t an option.
Xactly and The CFO Alliance recently held a webinar about the new Revenue Recognition Standard and its impact on commission expense accounting, which you can view on-demand here. Additionally, Xactly has put together a number of resources to help businesses understand the changes.
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.