Are you confident in your ASC 606 expense policy?
Your next audit will require major changes to the recognition of commission expenses
As of January 1, 2019, all companies are required to adopt ASC 606/IFRS 15, new accounting standards that change the recognition of revenues and related expenses such as sales commissions, bonuses, and other incentive compensation. So what changes? Read on.
Direct and Incremental
Contract costs are defined under ASC 606 as costs that are direct and incremental as a result of this new contract. This requires developing a strong understanding of your compensation plans.
Payments related to pipeline, activity (like “meetings scheduled”) or aggregate portfolio performance (like “Net Renewal Rate”) aren’t considered contract costs. Neither are guaranteed payments like salaries or non-recoverable draws.
ASC 606 attempts to make transactional and recurring revenue business more comparable. A recurring-revenue business model hinges on the assumption that higher customer acquisition costs are justified by long-term customer lifetime value.
You must elect an estimated customer lifetime, called the Period of Benefit, based on your historical and expected renewal rates.
If you have higher commissions costs for new business, you will need to amortize those deals over the period of benefit.
Amortized expenses must be accelerated if the customer terminates before the amortization end date.
This means that if you are amortizing a commission over a 5 year period of benefit and your customer terminates in year 3, the additional 2 years must be recognized at the point of termination.
Period of Benefit
Friends don't let friends do spreadsheets
Tracking all of your comp plans and triggers, plus all of your opportunity data and account history data is nearly impossible to maintain in a spreadsheet, not to mention all of the manual judgement that is used in designing the spreadsheet.
Concert systematically selects the right expense policy and ensures accurate accounting.
Concert also monitors your customer relationships, and automatically accelerates amortization expense when needed.