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Brace for Impact: ASC 606 and IFRS 15 Are Almost Here, and There’s No Place to Hide

Businesses everywhere are gearing up for new regulations in corporate accounting: amendments to ASC 606 in the US and IFRS 15 internationally will soon be enforced. Designed to converge similar US and international revenue recognition standards, the regulations will go into effect for most companies in either December of 2017 or in 2018, and will simplify the comparison of financial statements across companies and industries.

Compliance

To be in compliance, organizations around the world that pay commissions – for our purposes, sales commissions – on revenue generated from contracts, and recognize revenue under either the GAAP in the US or IFRS internationally, will be required to capitalize the incremental costs of obtaining a contract at inception, if the contract’s duration is longer than one year[1]. In other words, commissions paid to salespeople for these contract types can no longer be treated as a onetime expense. Instead, they must be treated as an asset that gets amortized over the duration of the contract. The duration of amortization will vary depending on whether or not the contract is reasonably expected to be renewed.

Ensure Sales Operations is ready

Sales Operations will need to be prepared for and understand the effects of this disruption, as compliance is expected to impact an entire range of Sales Operations and Finance leaders – from CFOs, to end-users. Accounting managers, finance managers, auditors and compensation administrators will be pressed to implement and execute solutions for the many challenges the changes will bring. The list below paints a broad picture of what these challenges may look like.

  • Difficulty in tracking sales and commissions for salespeople and their managers – the compensation admin will have to identify the contracts whose commissions need to be amortized.
  • Commission calculations may not be granular enough to connect commissions to specific contracts.
  • Complex contracts that use tiered pricing and discounts, and/or get modified regularly, may get harder to manage.
  • The use of spreadsheets to track sales commissions may lead to more errors and miscalculations.

These underlying issues could result in significant reporting challenges, including the following:

– Inaccurate and/or inconsistent financial reporting, leading to credibility issues in the marketplace.

– Inefficient accounting efforts if automated solutions aren’t established for commission calculations and accounting.

What can companies do to reduce the disruption caused by ASC 606 (and IFRS 15)?

Ideally, you’ll have processes firmly in place to integrate ASC 606 (and IFRS 15) without changing your established compensation plan. Make sure the following capabilities are provided.

  • Seamless integration with your sales compensation management solution for effective sales commissions amortization
  • Efficient, granular sales commissions processing that streamlines the identification and reporting of contracts and associated sales commissions eligible for amortization
  • Flexible handling of various levels of complexity associated with contract identification

Looking towards the near future, Sales Operations must stand its ground against possible pressures to create or modify compensation plans only to comply with these challenges. Making unnecessary changes to compensation plans can backfire big-time, provoking your sales reps to become less engaged and more of a flight risk. In contrast, a robust sales performance management solution will drive sales and motivate sales reps, regardless of the complexity of commissions accounting.

[1] Contracts associated with Insurance, Leases, and Financial Instruments are excluded from ASC 606 and IFRS 15.

 

 

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