ASC 606, also known as the new revenue recognition standard, has significant implications for sales commission accounting.
Under this standard, revenue is recognized when performance obligations are satisfied, which can be different from the traditional method of recognizing revenue upon delivery or transfer of ownership.
As a result, the timing of revenue recognition may be delayed, which may delay the recognition of commission expenses.
To account for sales commissions under the new revenue recognition standard, companies need to:
Overall, it requires companies to consider the timing and amount of commission expenses for revenue recognition, which may result in changes to their sales commission accounting policies and procedures and is generally accepted accounting principles gaap.
As a CFO of a SaaS company, it's important 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
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.
Let's say your company has determined that the performance obligation is satisfied evenly over the subscription period, so 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.
i) To account for sales commissions under ASC 606, your company must estimate and recognize the commission expense when the related revenue is recognized.
In this example, your company will recognize 10% of $10,000 = $1,000 of commission expense each month for the duration of the contract.
ii) In addition, your company must capitalize any commission costs incurred to obtain the contract and amortize them over the expected life of the contract.
Let's say your company incurred $5,000 in sales commissions to obtain the contract. Your company would capitalize on this amount and recognize $5,000/12 = $417
of commission expense each month for the 12-month contract period.
So, in summary, under ASC 606, your company will recognize
$10,000 of revenue and $1,417 of commission expense each month for the duration of the 1-year contract.
The commission expense includes both the estimated commission expense related to the performance obligation and the capitalized commission costs incurred to obtain the contract.
Implementing ASC 606 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:
In summary, implementing ASC 606 can be a complex and challenging process that requires careful planning and execution. Companies may encounter difficulties in identifying all revenue streams, assessing the impact on financial statements, addressing internal controls, educating employees, and ensuring system readiness.
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:
1. ASC 606 requires companies to track and account for variable considerations, such as discounts or refunds, in contracts with customers. Sales commission software can help automate the process of tracking and calculating commissions based on the total contract value, including any variable consideration. This can help ensure that commission expense is recognized appropriately and consistently in accordance with ASC 606.
2. 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 expense over time as well, based on the timing of revenue recognition. This can help ensure that commission expense is recognized in a manner consistent with the underlying revenue recognition policies.
3. By 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.
4. By providing a central repository for data. Sales commission software can store all the relevant data related to sales transactions, including performance obligations, transaction prices, and commission rates. This data can be easily accessed and reviewed by the finance team to ensure compliance with ASC 606.
5. By generating reports and analytics needed for ASC 606. Sales commission software can generate reports and analytics that provide insights into the performance of the sales team and the overall revenue recognition process. These reports can 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 help automate commission calculations, improve transparency and accuracy, and provide real-time reporting, which can all be beneficial in supporting compliance with ASC 606.
In summary, using sales commission software like visdum.com can help companies comply with ASC 606 by automating the tracking and calculation of commissions, ensuring consistent recognition of commission expense, and providing greater transparency and accuracy in commission calculations.