Sales organizations scrambled to comply with the Accounting Standards Codification (ASC) when it was introduced a few years ago. This new set of standards was implemented by the Financial Accounting Standards Board (FASB). One important part of the code, ASC 606, transformed commission accounting entirely.
Essentially, organizations that earned revenue through subscription sales or long-term contracts had to change their ways. The revenue recognition standard set forth by ASC 606 declared that companies follow a new set of rules. Those rules applied to both how contracts were recognized as well as how they applied to reported revenue. It has a direct impact on sales commission schedules as well.
To explain it in simple terms, these rules set criteria for how an organization applies contracts to revenue reporting. It also changes how a company might recognize commission payments in accounting terms. We’ve broken it down a little more simply for anyone trying to figure out what that means for commission management.
What is a Contract?
Of course, most organizations are pretty clear on what a contract is and what it isn’t. It’s important to note that the new standard has a specific definition. As defined by ASC 606, a contract binds an organization to supplying goods or services over a period of time.
The revenue recognition standard recognizes that contracts can be broken. For that reason, it instructs companies to hold off reporting the contract as revenue until the goods or services have been fully delivered. In other words, companies adopted a new revenue recognition amortization schedule.
Commissions Paid on Contracts
The new schedule impacts how companies distribute commissions too. The timeframe for commissions stretches to meet the length of the contract. That means a salesperson earns incentives throughout the lifetime of that contract rather than all at once. For some organizations, this didn’t require much of a change. However, employers who chose to pay commissions immediately and close the books on it had to reorganize that accounting.
When it comes to contracts, the standard also sets an expectation that a number of performance obligations are represented in a single contract. As each of those obligations is met, the price of each may be recognized as revenue. That then becomes applicable to commissions. An organization often chooses to reward the incentive related to each obligation as it becomes revenue.
In Case of Refund
According to ASC 606, when a customer requires a refund on a contract, the organization must report this against its revenue. The trickle-down effect of this results in a stoppage of commissions on that contract. In some cases, it may even trigger a chargeback.
In light of this, organizations must also capitalize commission and bonus payments tied directly to contracts. That’s a departure from how many companies treated commissions previously. Often commissions and bonuses had been treated as expenses.
Suffice it to say that any organization navigating ASC 606 while calculating commissions is facing quite a task. We are here to help you simplify this — or any other method required in paying commissions.
Contact us for more information on how we can simplify your commission rules. You can also set up a free demo where we’ll walk you through the entire process. We look forward to working with you on automating every element of your commission plan.