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Define Your ASC 606 Contract Cost Policy

Defining your ASC 606 Contract Cost policy should not be hard

Managing this large volume of data, keeping the data updated, and ensuring consistent accounting treatment is a different story

Document the types of sales comp you are paying today

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.  

 

ASC 606 requires you to have an estimated customer lifetime, called the Period of Benefit. We put together this simple decision tree to help you define your Period of Benefit.

 

Once you have defined this, track the history of what’s happened with your customers over the last 5 years and extrapolate what will happen with future customers.

ASC 606 Decision Tree

Churn matters even more

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.

Define an expected customer lifetime (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.

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