In part 1 of this blog series we covered the compliance risks and administration risks that can arise from your sales operations team using a tool that isn’t capable of handling sales commission accounting and revenue recognition according to the guidance set out in the FASB-IASB Accounting Standards Update No. 2014-09 and IFRS 15 that come into effect on January 1, 2018.
If you haven’t read the first post, you visit it here. You can also download the full whitepaper article on which these blog posts are based at this link.
In this post we cover modeling, integration and flexibility risks.
Accounting for the incremental costs of obtaining contracts associated with actual sales contracts is complex on its own, but when modeling these costs in a forecast or plan modeling scenario the process becomes significantly more complex and open to risk. See the Advanced Modeling post on our blog for a detailed look.
Consolidating and calculating sales, revenue, compensation and other costs and expenses requires a system with an open and flexible data model. The system needs to be able to integrate with a number of source systems, such as an ERP, CRM and HCM. In order to process all of this data together, the system needs to be able to accept data in any format and to then simplify the export process, the system needs to massage the data into a prescribed format. When the system has calculated the capitalization and amortization amounts, and ultimately the expenses associated with the incremental costs of obtaining contracts, it is important to also dynamically generate the journal entries needed to seed the general ledger.
The new standards are changing how revenue recognition is managed, and similarly, the recognition of the incremental costs of obtaining contracts with customers, from a rules-based approach to a principles-based approach. Given that, the exact implementation of the new
standards is up for interpretation. The accounting boards and firms are expending an incredible amount of time and effort compiling guidance about how to handle the incremental costs of obtaining contracts across an extraordinarily large number of different business scenarios and the consensus is that there isn’t a definitive rule that governs every situation. As such, the system used to manage the accounting for the incremental costs of obtaining contracts needs to be extremely flexible to accommodate a number of different and ever-changing scenarios and set of business rules.
Advanced Commission Modeling Topics
Consider a recurring revenue-based software company that sells multi-year and multiple-element deals. If this company is attempting to model the expected expenses associated with obtaining the contracts included in its sales plan for the following fiscal year, it will have to take into consideration how modeling this scenario will impact sales and revenue management, incentive compensation management, and profitability management.We cover this scenario in detail in this post on advanced commission modelling.