Updated: Aug 7, 2019
As of 2019, all companies must adopt new accounting rules related to commissions, causing most SaaS commissions expense to be amortized over either an expected customer lifetime or the contracted service period.
Happy New Year! 2019 brings a lot of exciting changes: a new commitment to working out, a new Ariana Grande album, and most importantly ASC 606/IFRS 15- the accounting rules that will forever change the way you look at commissions expense.
Isn't ASC 606 a revenue thing?
While billed as new revenue guidance, ASC 606/IFRS 15’s far more challenging changes come in the new standards related to costs incurred to obtain and fulfill signed contracts. These costs, including commissions, must be amortized over a period over benefit, up to an estimated customer lifetime.
There’s some nuance in this (if you really want to nerd out, jump down this rabbit hole.) The high level is:
The intention of the new accounting rule is to make businesses look more comparable.
In SaaS, we pay relatively high commissions rates on new business because we understand that our new customers will probably renew for years to come. Today, contrasted with a non-SaaS business, our cost of sales in year 1 looks really high, but in future periods looks artificially low.
So what do I do?
The two most important things to get started are to:
1. Read your comp plans, and understand if your sales/service/exec teams paid based on deals closing. We recommend writing out the algebraic formula of how people are paid to see if you can trace a commission back to a specific deal closing.
2. Build a cohort analysis spreadsheet to learn customer lifetimes.
These two pieces are the most important building blocks that help you explain all the unique parts of business to your auditors.
As for the painful amortization schedules? We got you covered.
Questions and comments welcome below.