FASB and IASB, the two key global financial regulators have recently updated their guidelines on revenue recognition in financial terms through ASC 606 in the US and IFRS 15 its international equivalent. This has the potential of disrupting the current accounting practices for most sales organizations. It will start with some publicly listed companies and by 2018 all companies will have to comply with it.
So, what’s changing and how does it impact you?
The good part is that the overall sales compensation plans or designs will not be affected by the new regulations. You can still execute your planned vision with regards to your sales compensation strategy, albeit the way your accounting team accrues commission expenses gets changed drastically. The basic premise on which both ASC 606 and IFRS 15 have been formulated is that an organization can recognize revenue and the corresponding expenses from a contract only when the customer is satisfied. What it means is revenue recognition is no longer dependent on the realization of internal events such as successful delivery made to the customer or the passage of a certain amount of time.
Obviously, it makes the simple process of expensing sales compensations a lot more complex, especially for companies that enter into intricate multi-year contracts with their customers. The finance teams of these companies will have amortize commission expense for their sales teams over the entire length of contract. For eg. if a sales person gets into a three-year contract with a customer and gets $ 100,000 as commission, then this amount cannot be expensed in the year the contract was signed. Rather, it will have to be amortized over the three-year term of the contract.
Now, it gets a lot more complicated in cases where the contracts have elements such as variable service deliverables, floating terms and conditions and dynamic pricing in them. Some companies may want to take the easy route and expense all sales commissions immediately for the sake of simplicity. But by doing so they will not be presenting an accurate financial picture of the company to its stakeholders. The larger enterprises and publicly listed companies cannot afford to do that. They will have to find ways to manage the change of accounting standards without burdening their already overworked staff with additional workload.
So, what can you do?
It’s going to get a lot more difficult to manage the sales commissions manually on an excel as it will not only put unnecessary pressure on the finance teams but also lead to several errors. Accountants will have to diligently track all those parameters that affect a sales person’s commission including the quality of work delivered and the nature of the contract. That’s next to impossible.
If configured correctly, your sales compensation software can overcome these challenges and simplify the process of tracking the amount of sales commission that has to be expensed in a year. Here’s how it can help you:
- Distinguish between contracts that are for a duration of one year or less and those greater than a year and maintain separate calculation methodologies for the two.
- Automatically capture all relevant characteristics of a transaction, calculate commission pay-outs and account expenses accordingly.
- Distinguish between direct sales commissions and incentive compensation that supervisors receive for the performance of their teams. While the latter must be expensed immediately, the former has to be amortized for a longer duration and realized as per the rules of the new accounting standards.
- Provide a holistic picture of the commissions expenses over several years to the sales head, so he can plan the sales strategy in a more decisive and accurate manner.
- Manage frequent changes in the contract and facilitate seamless accounting for them.
If you were already thinking of implementing a sales performance management system in your company, now is the right time. The new accounting regulations are just another reason why you should invest in an SPM system, but I think you can see the bigger picture as well. Don’t you?