The upcoming changes to ASC 606 will impact more than just how businesses recognize revenue, but also how they record their expenses including amortizing sales commissions.
One of the most overlooked implications of cost amortization for subscription businesses is the explosive growth of data volumes. The amount of data that the new standard introduces will make it practically impossible to manage commissions manually. For example, a waterfall amortization schedule will be required for every line item, for each person that gets compensated, on every contract.
Typically, the biggest expense associated with obtaining contracts with customers is incentive compensation, and for subscription businesses, that includes more than just the sales team’s commission. Compensation also includes professional services, customer success, account management, overall management and everyone else who is directly associated with obtaining and executing the contract. Any time there is a change to a contract (subscription line items added, numbers of users amended, etc.) the amortization has to be changed, which is followed by a waterfall of complex calculations.
When there is a change, there is an impact on how teams manage that change. The amortization of sales commissions simply cannot be managed solely in an ERP or revenue management solution. Traditional incentive compensation management solutions attempt to simply distill commission earnings down to a granular level so that the results can be uploaded to a finance system for capitalization and amortization. However, in the subscription economy the changes in contracts happen fast and often, meaning that the management of commission earnings and payouts must be integrated with the management of commission accounting. Passing that responsibility onto the ERP is just not enough.
In order to automate the cost-accounting process under the new revenue standards, you need to factor in four key elements into the solution: