As a result of ASC606, there is a continuous need from Commission Accounting to capitalize commissions. Businesses are in dire need to automate the manual process of capitalizing commissions in order to comply with ASC606. As long as the function can be narrowed down to commission capitalization and not revenue recognition, SAP Commission’s built-in rule writing functionality can solve this problem by allowing companies to spread the commission payment over the contract term. Spectrum has leveraged that functionality and has built a commissions capitalization solution for our customers without requiring them to purchase additional software.
What is ASC 606 and ASC340-40
ASC 606 focuses on the transfer of control rather than the satisfaction of obligations prescribed by ASC 605. The underlying principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that they expect to be entitled to in the exchange for goods and services provided. A five step process has been designed for individual or pools of contracts to keep financial statement preparers focused on this principle. The steps include:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract(s)
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract(s)
- Recognize revenue when or as the entity satisfies a performance obligation
ASC 606 requires more comprehensive and detailed disclosures than what is currently required under ASC 605. ASC340-40 deals with Commission Capitalization.
Implementing ASC340-40 using SAP Commissions
Commissions customers for whom ASC340-40 rules apply, need to spread commissions capitalization over the contract term. Contracts could be a one year or ten year contract. Each company has different rules with respect to how to spread the commissions over the contract period. Spectrum has built functionality using the SAP Commissions application allowing customers to define commission capitalization rules down to the contract or customer level. In addition, we have developed easy to follow out-of-the box reporting and the ability to integrate with the ERP systems to enter journal entries.
- Defining Commission Capitalization rules / criteria — Spectrum is using SAP Commission’s features including state-of-the-art rule writing to define the commission capitalization criteria. SAP Commission’s calculation/ pipeline process takes these rules into account and calculates how to distribute commissions over the contract term.
- Reporting – Spectrum has built out-of-the-box reports to show commission capitalization over the contract term at the lowest granularity required. These reports can be configured to meet customer requirements. For SAP Analytics customers, Spectrum has created analytical reports that show slicing of these information.
- Integration – Spectrum can integrate with your preferred ERP to send journal entries automating using SAP Cloud Platform Integration (for HANA customers) or Connect Enterprise (for Oracle customers).
If you are interested in learning more about Spectrum’s commission capitalization functionality for SAP Commissions, feel free to contact me.
This post is part of series by Abhijit Sant on 21st Century Commission Calculations – taking your SAP Commissions implementations beyond the basics.
About Abhijit Sant:
Abhijit Sant is the Senior Vice President at Spectrum Technologies leading SAP Practice. Before, joining Spectrum, Abhijit worked for SAP / CallidusCloud for 20 years in many roles including North America Implementation and Business Development Vice President.