ASC 606: The Impact on Sales Commission Part 2 of 2
In my previous blog on the ASC 606: Revenue Recognition topic from the Financial Accounting Standards Board (FASB), I provided some background to the new regulation and covered some potential impacts to those in sales comp and sales ops-related roles. However, with these implications, the question remains – “So what am I supposed to do about it?”
We’ll examine the action items to consider to ensure you aren’t caught off guard if your internal accounting teams require more detailed compensation-related data from your team to remain compliant to these new revenue recognition rules.
How can I be most prepared?
Those in the sales compensation and sales operations space will rely mostly on internal accounting counterparts to decide as a company which methodology the organization plans to adopt for recognizing revenue. This, in turn, will impact how the sales compensation program and data requirements will be developed for the upcoming year. For the transition, there are pros and cons to each option, which they are calling a full retrospective method versus a modified retrospective method. These options include considerations for historical data restating requirements and overall data volume requirements.
The ASC 606 regulation had a broad-reaching impact on how revenue must be recognized and how associated commission expenses are tracked over time. First, the sales compensation admins and sales operations resources must be aligned with their accounting and audit teams to ensure the proper approach and methodology for compliance with this regulation are determined. Once an approach has been reviewed and vetted across all parties, the owners and administrators of the upstream incentive compensation management (ICM) calculation engines – whether home-grown or out of a box – should begin an assessment and gap analysis to determine what changes are potentially required for the transition and ongoing compliance. Consider asking these questions in the following areas:
- Do you have all the fields necessary related to your contracts or products to make the necessary assessments for commission expense recognition and amortization?
- Are you bringing in the level of transactional details necessary to meet your compliance assessment and calculation requirements?
- Based on the adoption method, how easy will it be to access the prior two years detailed historical assessment?
- Calculation Logic/Assessment Rules
- Do your calculation rules for commission payment amounts currently get you to the level of detail for the required analysis or are they summarized at a higher payee level only?
- Where will the logic reside to adequately satisfy the five core contract assessment steps or if there are further contract modifications that might impact the amortization period?
- Is your data in a format that can easily be extracted and interpreted for downstream accounting teams to appropriately recognize commissions expenses in the correct period for audit compliance?
- Can you support the required dual reporting which means two sets of financial books during this transition?
Amortization Calculation Engine – what’s the link between accounting and ICM?
Once your assessments are completed internally for compliance with ASC 606 and the necessary ICM configuration changes are determined, the final solution step involves determining the commission expense amortization schedule, as it relates to the identified performance obligation period for each contract component. Based on how your organization chooses to comply with this regulation, the internal accounting team should provide the sales compensation support team with the format and data needs for this critical step, so that an outbound data extract can be designed out of the ICM solution. As far as the execution of this key step, determine if your organization has an existing revenue management module available within an out-of-the-box solution to handle the assessment of initial and any future modified contract terms. If your company doesn’t already have a revenue management solution in-house, you can consider your current ICM vendor, as many of them have introduced configured solutions to address this contract assessment and commission expense amortization use case.
I use Excel for processing commissions – should I be concerned?
Finally, if your organization is currently leveraging spreadsheets to calculate commissions rather than putting in the investment for automated tools that increase auditability and compliance, remember that spreadsheets can only be so flexible and accommodating. In my time running numerous ICM vendor selection engagements over the last 10+ years, I have seen my fair share of companies leveraging very complicated, yet sophisticated, Excel models in workbooks spanning multiple tabs with delicate formulas that took hours to write and could break with one too many rules. If you consider trying to work in new layers of contract assessment steps to stay compliant under ASC 606 guidelines, with the complexities of tiered pricing, add-ons/extensions, and discounts to be able to help provide the necessary revenue and cost results at the contract level, this is not a sustainable mode of operation. This transition should be of utmost importance to your organization if using spreadsheets as the primary ICM calculation engine.
You don’t feel informed or prepared? Join the crowd.
If you are wondering why you haven’t been getting any insights or directions from your accounting teams on the revenue recognition adoption standard leading you to assess the potential impacts of your sales compensation program, you are not alone based on the numerous informal polls and more formalized surveys that have been completed over the last year.
- During a recent webinar hosted by NetSuite, they polled the participants as to whether they were preparing for ASC 606. The results showed that 60% attending the webinar hadn’t commenced preparation for addressing the ruling, while the 27% who did had only gone as far as establishing a plan and team.
- A survey conducted by the Connor Group, a specialized professional services firm in the financial accounting sector, provides insights into the fact that most companies are still assessing which adoption method to deploy. A recent follow-up only several months ago highlights that 87% of companies surveyed hadn’t completed a full assessment.
This plight of being in the majority with those unprepared probably doesn’t give you much comfort, but you can start asking questions to ensure things are moving forward in your company as those decisions for the adoption method will impact the potential gaps identified as part of your sales compensation program assessment. Need more guidance? Reach out to me at Mark.Ryberg@opensymmetry.com or speak with an OpenSymmetry consulting team to assess your existing sales compensation program and begin to prepare for the ASC 606 rollout.