Sales Commission Accounting

Are the tools that are used by your sales operations team a threat to your financial controls?

By now your accounting team has probably reviewed the FASB-IASB Accounting Standards Update No. 2014-09 and IFRS 15 that come into effect on January 1, 2018. These standards are focused on revenue from contracts with customers, and are commonly referred to as the “new revenue standard”. They will have a significant impact on how your company handles sales commission accounting and revenue recognition.

However, your company may still be facing a number of significant and unnecessary risks if your sales operations team doesn’t have the tools to let your finance team correctly account for sales costs.

In this blog series we answer two key questions:

  • What are the top five ways that your ability to cost account correctly is put at risk when the sales operations team doesn’t have the right tools?
  • What can you do to get back visibility and control so the sales operations team is in compliance with your company’s guidance on the new revenue recognition and sales cost and commission accounting standards?

The risks areas we examine are compliance, administration, modeling, integration, and flexibility. In this post, we look at compliance and administration risks. In the next post we look at modeling, integration and flexibility risks.

Compliance Risk

To ensure compliance it’s important to have a system which empowers collaboration across the organization to help manage a process which spans many different stakeholders and is required to be fully auditable.

This is because the new standards are really guidelines that are open to interpretation. Typically, the largest incremental costs of obtaining contracts are in the form of sales commissions and bonuses. The design and administration of sales commission and bonus programs and the management of the capitalization and amortization of the associated costs, which will be required based on the standards update, requires extensive collaboration across the Sales, Sales Operations, Human Resources, Compensation and Finance departments. If the sales operations team’s tools don’t encourage this kind of collaboration, non-compliance becomes a considerable risk.

Administration Risk

Managing the incremental costs of obtaining contracts requires linking the costs to the associated sales realized by the contracts and recognizing the expenses relative to the recognized revenue. This can be a very complex process in multiple-element contracts.

Each determinable element needs to be uniquely managed, so that the sales and revenue and appropriate incremental costs and expenses of obtaining each element are accounted for together.

It will be a very difficult process to properly recognize revenue under the new standards, and the process will be significantly more complex when the associated costs need to be calculated based on the sales from the contracts and then capitalized and amortized relative to the associated revenue recognition patterns.

Modeling, integration and flexibility risk

In Part 2 of this blog series we talk about the modeling, integration, and flexibility risks that your company faces when accounting for sales commissions.

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