Decoding ASC 606: How it Impacts Sales Commissions

ASC 606 is a revenue recognition standard created by the Financial Accounting Standards Board (FASB) and International Accounting Standards (IASB). Like its name suggests, ASC 606 sets standard global accounting principles for all private or public companies that enter sales agreements or contracts with customers. 

What Are the Goals of ASC 606?

In essence, ASC 606 is about getting private and public companies around the world on the same page. Here’s more detail into what ASC 606 is aiming to achieve, as outlined by FASB.

  • Guard against inconsistencies in existing revenue requirements
  • Provides a more robust framework for addressing revenue issues
  • Create a more informed way to compare revenue recognition across entities, industries, jurisdictions, and capital markets
  • Offer more detailed, useful information through improved disclosure requirements
  • Simplify the preparation of financial statements by having a single source of truth.

5 Steps for Recognizing Revenue

FASB and IASB established five steps for determining how to recognize revenue.

Five step chart to recognizing revenue

How Does ASC 606 Impact Your Sales Compensation Team?

ASC 606 isn’t just about recognizing revenue. ASC 340-40, a subtopic of ASC 606, sets standards related to costs incurred to obtain and fulfill signed contracts. These costs include commissions, which must be amortized over a period over benefit, up to an estimated customer lifetime. 

Before ASC 606 came into play, commission expenses were recognized in the period incurred. So, let’s say you owed $1,000 of commissions from a deal closed in January 2017, you would call it a January expense, even if it didn’t get through payroll until February. It’s off your spreadsheet, move on to the next month (or tab).

So, what happens now? First, how do you determine the right commission expense policy?  
Take a look at this decision tree.

Choose the right commission expense policy with this decision tree

This is a simplified example of one of many tasks you need to accomplish to be ASC 606 compliant. Tracking sales commissions and payouts is a lot more complex. Sales commissions or costs must be capitalized and amortized over the time required to fulfill the performance obligations of a contract. This mean sales commissions can haunt your spreadsheets for a long time and data maintenance becomes a bigger headache. You need to keep on top of more comprehensive data that is accurate and current. Manual processes, combined with complex formulas, are a recipe for a burned-out team. And when you’re a growing business, this only piles on an extra layer of pressure (and spreadsheets, emails, pings…).

How Can the Right ICM Solution Help with ASC 606?

Private and public companies are investing in an Incentive Compensation Management (ICM) solution to calm the chaos and ease some of the growing pains. Every team has slightly different wants and needs from an ICM solution but let’s focus on how the right tool remove the inevitable friction caused by ASC 606.

Keep everything in place. Visualize and control all your compensation rules and data in one place instead of getting lost in data scattered across apps, sheets, tabs, emails…

Stay on top of compliance. The right solution will feature simple, pre-built integration into accounting. Along with fully defined journal entry reporting and built-in compliance through complete auditing, payment transparency and turnkey support for ASC 606/ASC 340-40. 

Automate, automate, automate. Don’t let your team get lost in manual processes that lead to errors, complex formulas, outdated data, and thoughts of throwing a computer out of the window. Easily connect data across your CRM, ERP, and other systems to keep it all in sync. And choose a tool that uses conversational set up and wizards, no advanced degree required.

Collaborate cross teams. ASC 606 requires comp admins and accounting to work closely together. Instead of emailing spreadsheets around (it’s a security risk and often no audit trail), everyone can work within the same tool, capturing an audit trail.

Read about what the ideal software solution looks like for your team. Want to get into the details of ASC 606? Check out this comprehensive guide put together by the AICPA.

Following ASC 606 standards isn’t straightforward. Book a demo to experience how Varicent ICM for Growth Markets can help you streamline, stay in compliance (and keep computers intact).