ASC 606, and its international counterpart IFRS 15, changed the way companies must calculate commissions for the increasingly common case of goods and services that are delivered over time, governed by detailed contract terms, such as subscription services like Software-as-a-Service (SaaS).
Since fiscal 2018-2019, both public and private companies of all sizes have been required to follow the new guidelines. However, not all companies have adequate compensation systems in place to comply with the regulations in a transparent, traceable, and accurate manner.
Both ASC 606 and IFRS 15 have had a significant impact on sales compensation for such contracts, and require the ability to track customer lifecycle, contract, and sales transactional details to calculate commissions.
And, because the commissions generally are considered incremental costs of obtaining a contract, this affects whether they are capitalized or expensed, so careful tracking of sales compensation related to subscription revenue is critical for audit and compliance.
The Impact on Compensation Calculation and Reporting
Regardless of when you receive payment, under ASC 606, you can’t recognize the revenue until you satisfy the related performance obligation by transferring a promised good or service to the customer.
The rules address the increasingly common case of goods and services that are delivered over time, governed by detailed contract terms. Companies whose sales fall into this model—Telecom, Software, Real Estate, and other industries with long-term contracts—will need to adjust to this new standard, calculating and reporting on the related revenue-based compensation correctly, transparently, and in an auditable way.
Case Study: Software Provider—Questions to Ask
A customer signs a multi-year contract for your Software-as-a-Service solution:
- When do you recognize the revenue?
- How and when do you commission the salesperson that sold the deal, and the sales manager or other sales team members in a group performance plan?
- Which types of compensation need to be capitalized, and which are expensed?
- What happens when the contract is modified?
- How do you track this on a contract-by-contract basis, or even at a line item level on the contract over time, for compliance reporting and risk management?
- How do you develop models for compensation planning and forecasting accurately, given this complexity?
Fortunately, with the right compensation solution, you can track sales details down to the transaction line item level, simulate compensation plans and models, ensure they meet business goals and compliance requirements, and produce the detailed reporting needed to support sales and sales operations, finance, and compliance.
Download the report on how your organization can comply with ASC 606/IFRS 15 requirements.