Accounting regulations don’t typically affect the day-to-day work lives of HR professionals, but that will soon change.Starting in 2018 (public companies) and in 2019 (private companies), a new revenue standard will significantly change revenue recognition, especially for companies that earn recurring revenue.
New Rules Change the Way Revenue Will Be Recognized
The new regulations adopt IFRS 15 revenue management guidelines from the Financial Accounting Standards Board and the International Accounting Standards Board as well as Accounting Standards Codification (ASC) 606. The change is intended to increase transparency of financial results and to standardize them across industries, globally.
When the new rules are in place, whenever a customer contract changes firms will have to reallocate revenue in order to align expense recognition with contract delivery. Put another way, they will need to capitalize the incremental costs of a contract, including those portions that deal with sales commission. This may sound simple, but for companies that employ selling on commission or recurring revenue models it’s actually quite complex.
Accounting for Compensation More Difficult
Expense recognition becomes complicated when it involves commissions on recurring revenue. Many commission plans have intricacies that make it difficult to determine an accounting methodology—for example, by expensing up front, or by capitalizing and amortizing expenses.
Following the new regulations will require more checks and balances, meaning more process and more internal controls on customer contracts—requiring more time and effort on the part of the compensation team.
Sales Must Involve HR and Finance
Because these changes don’t come into effect until 2018, your average compensation team is not aware of what changes will be required under the new rules. Nor do they understand the implications that the rules will have on demonstrating profit. These new rules will certainly make accounting more complicated, but they may also force a change: a wholesale restructuring of sales commission plans.
This level of change is not a quick few weeks’ work—hence the urgency. To align with a firm’s business objectives, plans might need to be re-engineered to focus remuneration around recognized revenue instead of bookings. Such a sea change cannot be brought about by Sales alone. Finance and HR must put their shoulders to the wheel in redesigning plans, in order to build in the proper sales incentives while meeting business objectives and conforming with the new regulations.
Automation to the Rescue
Whether or not your commission plans need to change, the new revenue recognition rules will have a major impact on companies with anything other than the simplest of contracts. A large proportion of recurring revenue companies do not have accounting systems that can meet the challenge ahead. Over 70% of firms currently manage sales compensation with spreadsheets, yet admit that the practice makes commissions difficult to manage. When the new standards arrive, it can only get worse.
Full-featured sales compensation management systems like Obero SPM are built with complex compensation plans in mind. Obero SPM can be programmed to automatically calculate commission and incentive payments, and to capture all transaction characteristics, allocating funds as accounting treatments require. The only consideration is how your sales compensation management system interacts with your ERP and with your revenue management system.
For more information about the new accounting standard, visit www.oberospm.com/newrevenuestandard.