Money Matters

Compensation accounting under ASC 606

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It was our pleasure to work closely with Ventana Research and Robert D. Kugel on a Q&A about the compensation accounting obligations of ASC 606.  With 2017 coming to an end in only a few short days, the deadline for the implementation of the new standards for public companies is quickly approaching.

And from what we’ve seen most companies are not ready.

Aside from companies (mostly subscription-based businesses) that have been capitalizing and amortizing contract acquisition costs (typically sales commissions) under ASC 605, early adopters of the standards are mostly made up of public companies. Among these companies that have been capitalizing and amortizing their commissions, we’ve yet to encounter a company whose processes align perfectly with the requirements of ASC 606.  Companies commonly hold back commissions, or at least a portion of the commissions, until the associated customer invoices are paid. In this scenario, companies will typically only capitalize their commissions as prepaid expenses after they’ve paid their sellers, meaning that commissions wouldn’t be capitalized until a while after the contract closed. But under ASC 606, those commissions have to be capitalized at the time the contract closes.

The structure of a company’s compensation plans will affect the complexity of the related accounting; especially in cases where multiple people receive sales compensation for a single transaction. But, we don’t necessarily think compensation plan designs will need to change. Companies will just need to be more aware of the impact that plan designs have on downstream accounting and the potential administrative workloads that could be introduced.

When it comes to forecasting commission expenses, it will require the marrying together of the amortization waterfall from existing contracts with the amortization waterfalls derived from the contracts that are expected to close. And that process likely won’t be simple as multiple forecasting methodologies might need to be implemented to determine the deals or sales figures which will be subject to commissions.

Companies with a moderately large set of commissioned employees and complex sales compensation plans will most likely find that sales compensation software can give the sales management team flexibility in setting and modifying compensation plans. To properly account for the capitalization and amortization balances, as well as the changes to those balances, you’re going to encounter roughly 100 times the commission data that is managed today.

A sales performance management solution will help to simplify the accounting, forecasting, and analysis of sales compensation, especially with the new standards coming into place. For more information about compensation accounting under ASC 606 and how a sales performance management solution can help you ensure compliance, click here.

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