Since its implementation for public companies in December 2017 (December 2018 for private companies), ASC 606 (IFRS 15) has raised many questions about how companies are transitioning and preparing to transition their accounting practices.
Under the new accounting standards, sales commissions associated with securing contracts need to be capitalized as an asset and amortized over the period the service is provided. Certain exceptions (e.g., service contracts lasting less than one year), sometimes called practical expenditures, can be expensed as the commission is incurred.
In our recent webinar, “Meet Commission Accounting Requirements Under ASC 606 (IFRS 15),” Xactly Sr. Director of Product Chris Li and Xactly Solutions Consultant Peter Lai discussed the three main considerations companies are facing as they approach ASC 606 compliance:
- Transition Approach: Full Retrospective vs. Modified Retrospective
- Methodology Approach: Portfolio-level vs. Contract-level Capitalization and Amortization
- Audit Approach: Material vs. Immaterial Adjustments/Tune-ups
The webinar also introduced Xactly’s newest solution, Commission Expense Accounting (CEA) powered by Obero. With nearly 70 percent of webinar attendees planning to transition to ASC 606 standards in the next two years, understanding the best approach is extremely important. To help you implement and adhere to the ASC 606 regulations more easily, we’ve broken down the top three implementation considerations and how Xacty’s CEA simplifies ASC 606 compliance.
The Transition Approach: Full vs. Modified Retrospective
The Approach: The ASC 606 standards require organizations to first decide how they will compile commissions data. This means companies must decide which transition approach they’ll take to implement the accounting standards. Under the full retrospective approach, companies must restate two full years of history as if they ASC 606 standards had been in place for those two years.
The other option for companies is the modified retrospective, which allows companies to figure out the impact of ASC 606 as of the adoption date. In our webinar, nearly 60 percent of attendees plan to implement with the modified retrospective approach. Under this approach, organizations need to run accounting books under both the new and old accounting standards for the full implementation year.
The modified approach is proving to be the most popular path for companies. In fact, 64 percent of organizations are planning to take or have taken this approach to implementation, up from 50 percent in 2017. In most cases, companies are choosing the modified approach because they do not have access to the granular level of data needed for past years’ accounting records.
How Xactly CEA helps: Xactly CEA eases companies transition into ASC 606 (IFRS 15) compliance for both the full and modified retrospective approaches. Under the modified retrospective approach, companies must run ASC 605 and ASC 606 regulations parallel, and essentially manage two separate sets of accounting books.
To help, CEA supports running any number of accounting books in parallel to easily see necessary data at any level. CEA allows sales and finance leaders to model out potential changes before implementing them and aids in commission expense forecasting by helping manage actual expenses separate from forecasting models.
The Methodology Approach: Portfolio- vs. Contract-level Capitalization and Amortization
The Approach: There are two ways for companies to address capitalization and amortization under ASC 606, dependent on the level of commission detail needed.
Webinar attendees varied in terms of how they want to approach ASC 606 (IFRS 15) methodology, with nearly half of attendees already using or planning on using the contract-level method.
Under the portfolio approach, companies with homogenous contracts that are very similar in nature can combine and aggregate those commissions and facilitate amortization at that level. However, in this method, organizations can lose insight into the fluctuation of those commissions.
Most companies are electing to capitalize and amortize with the second approach–at a contract-level. In fact, many organizations are gathering data at an even more detailed level. Some companies with multi-level contracts are gathering data at the performance-obligation level by pulling commission information on the services they provide related to each contract.
How Xactly CEA helps: Xactly CEA aids companies in the methodology approach of ASC 606 by facilitating capitalization and amortization of commission at almost any level, including portfolio- and contract-level. The application accommodates the application of any amortization method and provides sales and finance leaders with data for the:
- Initial contract period
- Average renewal period
- Average customer life
- Product use life
- Revenue recognition schedule
- Custom benefit period
The most common approach for companies is to capitalize and amortize commissions at the individual contract- or more detailed level. For net new contracts, many organizations are using a type of custom benefit period, which often includes customer life and expected renewals. At the time of renewal, organizations then amortize over the average renewal period.
The Audit Approach: Material vs. Immaterial Adjustments
The Approach: Changes in regulations, customer contracts, and commission corrections are sometimes inevitable. When these types of changes occur, it can impact your accounting entries. Before ASC 606, 79 percent of companies did not capitalize and amortize their commissions. Now companies need a basis for managing changes to their data and determining the right approach to adjusting entries.
In the webinar, most attendees were unsure how they would factor adjusting entries into their capitalization and amortization schedules. Under the accounting standards, companies have three options. First, they can factor in all adjustments as they arise and update their books as needed.
Companies can also apply none or a portion of the adjustments and perform periodic impairment analysis to ensure that their balance sheets and data remain correct and compliant.
How Xactly CEA helps: Auditing is perhaps the most difficult part of compliance because it relies on companies’ accounting judgment to decide which revenue and contract changes require adjustments to amortizations. Xactly CEA helps finance leaders by automating adjustments and tune-ups based on any changes to commission earnings; customer, contract, and/or employee statuses; and changes to accounting rules.
The CEA solution includes a library of summary and detailed reports to serve as a true commission accounting sub-ledger with a:
- Consolidated accounting dashboard
- Summary roll-forward report
- Capitalization and amortization schedules
- Multi-book comparative report
- Journal entry report
Moving Forward With ASC 606 Compliance
Implementation and compliance are proving to be data-demanding processes. With the right tools, organizations are finding the best implementation, methodology, and audit methods for ASC 606 compliance. Xactly CEA helps sales and finance leaders by supporting all implementation and methodology approaches and automating the auditing and adjustments needed for compliance. See how Xactly CEA can help your business today with a personalized demo!