Before the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) introduced ASC 606, methods and practices for SaaS sales commission expense accounting varied significantly across businesses.
The new standard outlines a comprehensive five-step model for revenue recognition, including sales commission expenses, aiming for greater consistency across various industries.
Broadly, the move from ASC 605 to ASC 606 brought in a more structured and unified framework across industries, aimed at enhancing transparency, standardization, and comparability in revenue recognition practices, reflecting a broader and more principles-based approach to accounting for revenue.
This blog will explore the changes brought by ASC 606 in the area of sales commission expensing. We will also look at ways and tools for SaaS companies to navigate this change and stay compliant.
Whether you're just starting to adapt to the new guidelines or seeking to optimize your current processes, this article aims to be your compass in the evolving world of SaaS sales commission expense accounting and ASC 606 compliance.
ASC 606 is a comprehensive and transformative accounting standard that addresses revenue recognition. The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
The essence of the ASC 606 revenue standard lies in faithfully representing the transfer of promised goods or services to customers, aligning with the anticipated consideration an entity expects in return.
Entities encounter substantial decision-making complexities when assessing the appropriate recognition of revenue from customer contracts. This decision-making process is crucial in the five-step framework of the revenue standard, guiding entities on the timing and magnitude of revenue recognition.
Endorsed by the Securities and Exchange Commission (SEC) as the revenue recognition standard, ASC 606 was designed to provide a more consistent and transparent method for recognizing revenue and expenses across industries, ensuring that financial statements are more comparable and understandable for investors and other stakeholders.
🔔 Also read: The Essential Guide to ASC 606 SaaS Revenue Recognition in 2024
Let's use the example of a software company that sells a bundled package for $10,000, which includes a three-year software subscription and a two-day training session. For every sale made, a salesperson receives a commission of $1,500.
Revenue Recognition:
Sales Commission Expensing:
If the software subscription revenue was recognized immediately, then both the revenue and the commission expense would hit the financials at the start. If the revenue was spread over three years, there would be a mismatch, with the commission expensed immediately but the revenue recognized over three years.
Step-1: Identify the contract with a customer
The company enters into a contract with a customer for a three-year software license and a two-day training session.
Step-2: Identify the performance obligations in the contract
Step-3: Determine the transaction price
The bundled package is sold for $10,000.
Step-4: Allocate the transaction price to performance obligations
Step-5: Recognize revenue when (or as) the company satisfies a performance obligation
The $1500 commission undergoes financial accounting treatment, being capitalized as an asset and then amortized over the three-year period, reflecting the principles of ASC 606.
Pro tip: In SaaS, roles like Inside Sales Reps and SDRs might earn commissions for short-term actions like monthly subscriptions or demo setups. Under ASC 606, such commissions, not directly tied to long-term sales outcomes, might be expensed immediately. Ensure your commission recognition aligns with the nature of the SaaS sales cycle and the associated role's responsibilities.
This approach ensures that the commission expense aligns with the revenue it helped generate, providing a clearer representation of the company's financial performance for each year of the contract.
Under ASC 606, sales commissions that are directly attributable to securing a contract can be capitalized and then amortized over the expected period of benefit, typically the customer's lifetime or the contract's term.
If you're interested in learning more, here's an in-depth video explanation by FASB.
For CFOs and financial controllers, the treatment of sales commissions under ASC 606 has direct implications for financial reporting as it alters how commissions appear on financial statements. This change not only affects the accuracy and transparency of reporting but also plays a significant role in budgeting and forecasting processes.
Additionally, while the cash outlay for commissions is immediate, the deferred expense recognition under ASC 606 can influence cash flow projections, making it essential for finance leaders to adjust their financial strategies accordingly.
Sales commission software provides CFOs and financial controllers with accurate, consistent, and transparent data, streamlining operations and ensuring that the sales commission component of their financials aligns with ASC 606 requirements.
🔔 Deep dive: ASC 606 and Sales Commission Accounting
Before diving into the types of commission-expensing tools, it's crucial to understand the functional requirements for ASC 606 compliance. For a CFO, ensuring ASC 606 compliance would focus on the following streamlined functional requirements:
Every CFO and Financial Controller would prioritize a solution that's comprehensive yet user-friendly, ensuring ASC 606 compliance while offering flexibility and insights for effective revenue management.
Let's evaluate each type of sales commission expensing software based on our discussions about ASC 606 compliance and the functional requirements.
Using spreadsheets or Excel for commission expensing is a manual approach. While it offers flexibility, it can be prone to errors, especially when dealing with complex commission structures and ASC 606 requirements. It might be suitable for smaller businesses with straightforward commission plans but can become cumbersome as the business grows or as commission structures become more intricate.
🔔 Read more on why spreadsheets are the wrong choice for sales commission tracking and expensing.
White Label or custom software is tailored to a company's specific needs. It can be designed to handle unique commission structures and can be integrated with other systems. However, it might require significant upfront investment and ongoing maintenance.
ERPs are comprehensive systems that handle various business processes, including finance. While they can manage sales commissions, they might not have the granularity or flexibility of specialized commission software. They also require significant investment and dedicated human resources to manage.
This type of software is specialized for sales commission management. It's designed to handle the intricacies of commission calculations, tracking, and reporting. Given its focus, it's likely to be the most aligned with ASC 606 requirements, especially if it's a modern solution like Visdum that’s aware of the standard.
While each option has its merits, the choice largely depends on the business's size, complexity of commission structures, budget, and how integral commission management is to its operations.
Choosing the right tool is like selecting the perfect vehicle for a long journey. It's essential to consider the terrain (your business needs) and the distance (scalability). Here are some factors to guide your choice:
In conclusion, while the journey to ASC 606 compliance might seem daunting, the right commission expensing tool can make it smoother. Among the options, "Automated Sales Commission Software" like Visdum stands out as an ideal choice, offering automation, accuracy, and ease of use.
Evaluate your options, consider your organization's unique needs, and embark on this journey with confidence.
Visdum is not just another sales commission software; it's a solution built with the intricacies of SaaS commission structures in mind. Recognizing the unique challenges and requirements of ASC 606, Visdum offers a suite of features that make compliance straightforward and efficient.
Transform your approach to ASC 606 compliance with Visdum, tailored for SaaS sales commission accounting. Experience the ease of automation and accuracy that come with our intuitive features and seamless integrations.
Choose the commission dates you need to process. Whether it's monthly, quarterly, or yearly, we've got you covered.
Effortlessly group transactions and set specific criteria to exclude certain commissions, like those paid to business development and customer success teams. Gain control over what you capitalize on.
Decide how you want to amortize commissions over the contract period or the estimated lifetime of the customer relationship.
Easily map your data streams and generate comprehensive sales commission reports for full ASC 606 compliance.
With Visdum, you're not just complying with ASC 606; you're setting a new standard in efficiency and accuracy for your financial operations. Make the smart choice today.
By choosing Visdum, SaaS companies not only streamline their commission processes but also fortify their financial reporting. The software's capabilities ensure that revenue recognition and commission expensing are in perfect harmony, as mandated by ASC 606.
Dive into the world of Visdum and experience seamless, accurate, and efficient commission tracking. Elevate your financial reporting and ensure unwavering compliance with ASC 606.
Start your Visdum journey today!
Yes, ASC 606 is mandatory for companies following Generally Accepted Accounting Principles (GAAP) in the United States. This includes both public and private companies.
The core principle of ASC 606 is to recognize revenue in a way that reflects the transfer of goods or services to customers at an amount that reflects the consideration a company expects to receive in exchange for those goods or services.
ASC 606 applies to entities that enter into contracts with customers to transfer goods or services. This includes public companies, private companies, and nonprofit organizations that follow GAAP in the United States.
ASC 606 is issued by the Financial Accounting Standards Board (FASB), which is the organization responsible for establishing accounting and financial reporting standards in the United States.