Starting in 2018 for public companies and in 2019 for private companies, a new revenue standard will significantly change revenue recognition, especially for sales compensation in subscription-based businesses.
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 FinanceBecause these changes don’t go into effect until 2018, some compensation teams may not be aware of what changes will be required under the new rules; nor do some 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. According to a recent survey, only 18% of finance professionals think that their ERP can automatically handle ASC 606 right now. Intacct users can rest assured that their accounting system is already ready for the change. Fast-growing businesses choose Intacct to automate subscription management and complex revenue accounting, while delivering deep insights into financial and operational outcomes.Recently introduced to the Intacct Marketplace, Obero SPM empowers organizations to manage their sales execution and sales optimization processes more efficiently and in full, unrestricted compliance with the upcoming regulatory changes - IFRS 15 / ASC 606. Drawing data directly from the Intacct ERP instance, Obero SPM will automatically calculate commission and incentive payments, capture all transaction characteristics, and allocate funds as accounting treatments require under the new revenue recognition regulations.
For more information about how Intacct and Obero SPM can help you ensure that your organization is compliant with the upcoming changes to the Revenue Recognition Standards, please visit http://oberospm.com/NewRevenueStandard/.