Determining a company’s sales performance and forecast relies heavily on the ability to properly measure revenue and manage cost of sale. When and how your organization recognizes revenue from contract with customers is about to change.
A new Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB) in the US will change revenue recognition requirements—this has the potential to affect sales costs such as commissions and bonuses. It can also impact: options vesting, employment agreements, and overall cash flow.
Why you should care
Tracking sales commission, capitalizing it and then amortizing, based on new recognition criteria is a laborious process with many compliance risks and failure points if not managed in an automated, auditable, transparent system.
The commissions payout schedules no longer align with commission cost recognition based on revenue recognition. Sales commissions are currently expensed once the money is incurred; this new regulation will require companies to capitalize and amortize based on when the revenue is recognized.
It also makes matching it to your revenue a difficult task. The incurred costs from that revenue have to be reported in the same accounting period.
This is a high priority issue for both private and public companies. Public companies are at risk of financial misstatements and will get audited. Private companies who are trying to raise funds or go public will want to be in-line with the new regulations. Any company that is hoping to grow wants to comply with accounting standards.
The added complexity for recurring revenue businesses
Managing, allocating, and recognizing costs from customer contracts is rapidly becoming a growing challenge for modern finance organizations.
Accounting for revenue across future periods and the associated costs can be very messy for companies selling multi-year deals, incurring costs attributable to a two- or three-year period.
Calculating commissions for recurring revenue businesses becomes complex:
- Sales reps are compensated on various net metrics such as Annual Contract Value (ACV) and Total Contract Value (TCV)
- Commissions payouts are now based on various milestones in contract such as Annual Subscription Renewal
- Clawbacks become an issue when commission is paid upfront
- Compensation plans are changing and evolving as businesses experiment with new ways to incentivise a sales team
New sales operations tools for new sales strategies
Obero SPM provides organizations with a solution that enables companies to manage and recognize costs associated to recurring revenue. Obero’s solution has the ability to record, manage, allocate and recognize cost from contracts with customers.
Managing Incentive Compensation with multiple Excel spreadsheets or another homegrown system will become increasingly complex once this new regulation is set in place. An automated ICM system will provide data at the right level to properly capitalize and amortize the cost of your sales.
Using old sales operations tools results in slow responses to changing plans, realigning territories, and adjusting compensation strategies based on changing business priorities.
IFRS 15: What you need to know
This single, comprehensive framework standardizes how companies should recognize revenue in financial statements under both US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
Companies can adopt the new “IFRS 15” regulation in the first quarter of fiscal year 2018 or fiscal year 2019.
“The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers.” (http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1351027207987)
Any contracts of one year or less are not impacted by the new ruling as everything must be done upfront.