ASC 606 is the new revenue recognition standard that has significant implications for sales commission accounting. Under this standard, revenue is recognized when performance obligations are satisfied. The obligations can be different from the traditional method of recognizing revenue upon delivery or transfer of ownership.
In the era before ASC 606, the timing of revenue recognition may be delayed, which directly impacts the recognition of commission expenses.
To account for sales commissions under the new revenue recognition standard, companies need to:
- Estimate and recognize the commission expense when the related revenue is recognized.
- Determine the transaction price, which varies depending on the performance obligation and the timing of revenue recognition.
- Consider any incremental costs of obtaining a contract, such as commissions paid to third-party agents or sales incentives paid to customers.
- Allocate the transaction price incurred to obtain a contract over the expected life of the contract.
- Revise their commission accounting processes and systems to accurately track and amortize commission costs over the life of the contract.
The new regulations need companies to consider the timing and amount of commission expenses for revenue recognition. The reconsideration often results in changes to their sales commission accounting policies and procedures, it is generally accepted as an accounting principles gap.
As a CFO of a SaaS company, it's vital to work closely with your accounting and sales teams to ensure that your company's commission accounting practices comply with ASC 606.
Let's take a hypothetical example to understand how ASC 606 impacts sales commission accounting.
Suppose your SaaS company enters into a with a customer for a subscription service:
- Contract Term = 1 year
- Annual Recurring Revenue = $120,000
- Payment Terms = Annual Upfront
Under the new standard, your company cannot recognize all $120,000 as revenue upfront. Instead, your company must recognize revenue over the 1-year subscription period as the performance obligations are satisfied.
Given your company has determined that the performance obligation is satisfied evenly over the subscription period, you will recognize $10,000 of revenue each month for the duration of the contract.
Further, your company has a standard commission rate of 10% for the sales team.
Step 1: To account for sales commissions under ASC 606, your company must estimate and recognize the commission expense when the related revenue is recognized.
In the above example, your company will recognize 10% of $10,000 = $1,000 of commission expense each month for the duration of the contract.
Step 2: Your company needs to capitalize any commission costs incurred to obtain the contract and gradually liquidate them over the expected life of the contract.
For example, if a company incurred $5,000 in sales commissions to obtain the contract. They would capitalize on this amount and recognize $5,000/12 = $417
of commission expense each month for the 12-month contract period.
In summary, under ASC 606, the company recognizes $10,000 of revenue and $1,417 of commission expense each month for the duration of the 1-year contract.
The expense includes both the estimated commission expense related to the performance obligation and the capitalized commission cost incurred to obtain the contract.
What are the challenges faced by SaaS CFOs in implementing ASC 606 standards?
Implementing ASC 606 and ensuring compliance can be a complex and challenging process, particularly for companies that have historically used a different revenue recognition methodology. Some of the difficulties that companies may encounter during implementation include:
- Identifying all revenue streams: One of the first steps in implementing ASC 606 is to identify all revenue streams and determine the appropriate revenue recognition method for each. This is often a challenging process for companies with complex revenue streams or for those that offer a range of products or services.
- Assessing the impact on financial statements: ASC 606 can impact a company's financial statements in various ways, including the timing, amount of revenue and cost recognition. Companies will need to precisely evaluate the impact of ASC 606 on their financial statements and ensure that they are presenting accurate and transparent financial information.
- Addressing internal controls: ASC 606 might require changes to a company's internal controls, particularly in the areas of contract management and revenue recognition. Companies will need to evaluate their internal control environment and make any necessary updates to ensure that they are compliant with the new standard.
- Educating employees: Companies will need to provide education and training to employees involved in the revenue recognition process to ensure that they understand the requirements of ASC 606 and can comply with the new standard.
- Ensuring system readiness: Organizations may need to make changes to their systems and processes to support compliance with ASC 606, such as updating financial reporting systems, modifying contract management processes, and implementing new controls.
In summary, implementing ASC 606 can be a complex and challenging process that requires careful planning and execution. The route towards proper compliance encounters difficulties in identifying all revenue streams, assessing the impact on financial statements, addressing internal controls, educating employees, and ensuring system readiness.
Can Sales Commission software help in complying with ASC 606?
A sales commission software can help SaaS companies comply with ASC 606 by providing a more accurate and efficient way of tracking and reporting commission expenses. Here are some ways sales commission software can help:
- ASC 606 requires you to track and account for variable considerations, such as discounts or refunds, in contracts with customers. Sales commission software can automate the process of tracking and calculating commissions based on the total contract value, including any variable consideration. This ensures that commission expense is recognized appropriately and consistently in accordance with ASC 606.
- ASC 606 requires companies to recognize revenue over time in some cases, such as in subscription-based models. Sales commission software can be set up to recognize commission expenses over time as well, based on the timing of revenue recognition. This ensures that commission expense is recognized in a manner consistent with the underlying revenue recognition policies.
- Through accurately calculating commission expenses, Sales commission software can automate the commission calculation process and ensure that commission expenses are accurately calculated based on the terms of the sales agreement. This helps to ensure that commission expenses are properly recognized under ASC 606.
- Maintaining a central repository for data through a Sales commission software can store all the relevant data related to sales transactions, including performance obligations, transaction prices, and commission rates. The data can be easily accessed and reviewed by the finance team to ensure compliance with ASC 606.
- Generate reports and analytics needed for ASC 606 with a Sales commission software that can provide insights into the performance of the sales team and the overall revenue recognition process. These reports help the finance team identify any issues or areas for improvement in complying with ASC 606.
Overall, sales commission software can help SaaS companies streamline the commission calculation process, ensure accurate commission expenses, and provide the necessary data and analytics to comply with ASC 606.
A report by PwC on the adoption of ASC 606 found that companies are investing in technology solutions to support compliance efforts, including sales commission software. The report noted that sales commission software can automate commission calculations, improve transparency and accuracy, and provide real-time reporting, which can all be beneficial in supporting compliance with ASC 606.
Using a sales commission software can ensure companies comply with ASC 606 by automating the tracking and calculation of commissions, along with maintaining a consistent recognition of commission expense by providing greater transparency and accuracy in commission calculations.
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- Select your dates: Choose the commission dates you need to process. Whether it's monthly, quarterly, or yearly, we've got you covered.
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