Top Lessons for Commission Expense Accounting Under ASC 606 (IFRS 15)

Last week Xactly co-sponsored a CFO Roundtable with our long-time partner and customer Salesforce. I had the honor of hosting the event, which focused on lessons learned so far on the critical path to global ASC 606 (IFRS 15) compliance.

The discussion focused on how organizations manage their commissions accounting under the new revenue recognition standards, as the industry is generally seeing a seismic shift from expensing in the period incurred to a ratable amortization approach (putting aside practical expedience).

Unlike the cost side of the new standard, the revenue recognition side for ASC 606 (IFRS 15) has received a lot of attention–and understandably took first priority in most compliance efforts (find additional resources in our ASC 606 compliance kit).

That’s now changing.

With companies more established in their revenue approach, they’re realizing there are significantly more challenges with accounting for the incremental cost of obtaining a contract than originally thought, and they vary by company. 

Companies are clearly at different stages in this process. A few like our featured roundtable guest, Sitecore, are further along in their ASC 606 implementations. However, most are still in the early stages of figuring out how they’re going to implement commission expense accounting processes, which include tracking, capitalizing, and amortizing commissions at a contract or portfolio level.

The following top takeaways emerged from our discussion.

1. Don’t Wait to Get Started

Get started with ASC 606 compliance processes early. It inevitably takes longer than you think. With adoption deadlines fast approaching for private companies, and auditors scrambling to learn the new revenue recognition standard themselves, organizations should have been laying the groundwork yesterday for how to address the new requirement today.

Moreover, critical choices must be made that impact your team’s labor requirements, such as whether you adopt a full or modified retrospective approach. If you choose to go full retrospective, you must plan for a longer implementation period and larger amount of resources to accomplish the job because you have a longer look back period which can span multiple years to recast your numbers. 

That is one reason why the majority of companies are looking at the modified retrospective approach to gain ASC 606 compliance. Additionally, as explained by Mayank Kalla, Finance Director at Sitecore, if you lack the ability to link historical commissions data directly to the respective revenue contract, the challenges to achieve full retrospective compliance are formidable, if not impossible.

Further, if you’re looking at a portfolio approach (amalgamating multiple contracts into larger balances), you also need to ensure you have the requisite data going back several years in order to provide clarity for that methodology.

Sitecore’s Kalla compared the process to peeling back an onion. Each requirement brings up another issue that must be resolved first.

• If you want to use full retrospective, how do you get the historical data?
• If you must amortize commission costs, how do you determine the appropriate amortization period, i.e. customer life?
• If you’re amortizing at the performance obligation level, what is your accounting treatment?

2. Look for and Secure the Right Tools

Many companies are finding shortcomings in their existing archaic and outdated tools to support what is needed to manage the commission side under the new standard. As noted earlier, the ability to link commissions amounts to revenue contracts may be difficult.

Companies with automated incentive compensation management (ICM) tools can easily gather this information, manage, and report on it. Those that don’t are at a severe disadvantage. Trying to access and track this data manually may be untenable depending on a company’s contract and commission structure. Often it can get too complex, doesn’t scale, makes accounting far more challenging, and provides pitfalls and blind spots along your entire audit trail.

An ICM tool alone doesn’t suffice in solving this problem. As voiced by attendees, an ideal solution would not only capture detailed commissions data but also provide the ability to manage the accounting process needed for ASC 606 compliance. 

 Having an integrated tool to support this process is critical. To effectively comply with ASC 606 (IFRS 15), a number of data sets must be brought together. Having them do this in an automated way can simplify the process, increase accuracy and make life easier on your accounting team. In addition, integration into the ERP system will be important. As one attendee noted:

“Having the tools talk effectively with each other is paramount.”

3. Gain Consensus for Your Approach

Lastly, it’s important to engage your auditors early in the process about the implementation approach and assumptions. No one wants audit surprises!

As we move toward the implementation deadline, it’s time for companies to evaluate their approach to handling commission accounting. Private companies have just a few short months to prepare. Public companies that have been doing this manually or piecemeal are also discovering they need a better solution.

The earlier you start, the more leverage you’ll have to negotiate with contractors, auditors or vendors. Don’t end up with your back against a wall or scrambling to play catch up.

Start early to reduce your risk and automate the ASC 606 compliance process and improve your life.

Take the Next Steps for ASC 606 Compliance

Xactly offers the industry’s only complete solution for managing commission expense accounting under ASC 606 (IFRS 15). Xactly CEA provides a two in one win – an ICM solution with a dynamic amortization tool on a single, end-to-end system.

To learn more about how our solution can help your organization successfully – and easily – adhere to the new revenue recognition standards, talk with and Xactly expert today for a personalized demo.