On May 20, 2020, companies all over the U.S. — that follow Generally Accepted Accounting Principles, or GAAP — received a pleasant surprise from the Financial Accounting Standards Board (FASB): a one-year extension on the deadline to adopt the new set of accounting standards called ASC 606.
So, what is ASC 606? Some consider ASC 606 to be the biggest change in accounting standards in the last 100 years.
Under ASC 606 (and related changes to ASC 340), companies need to:
- Modify how they recognize revenue
- Change how commissions are capitalized and amortized
What Does ASC 606 Mean for Businesses?
ASC 606 applies to companies that follow GAAP and enter into contracts with customers to transfer goods or services. Under ASC 606, businesses will likely need to disaggregate much of their data.
For example, let’s say a company used to maintain aggregated sales data based on ARR for the month and would calculate sales commissions based on that aggregated data. Under ASC 606, that company may now need to take its aggregated sales commissions — which include multiple products with differing revenue patterns (such as up-front revenues for on-premises software and over time revenues for post-contract support) — and disaggregate it.
This may require breaking down commissions calculations to the contract or product level, or a reasonable estimation method to disaggregate the commission amounts.
We anticipate that the explosive growth in data volumes will make manual management of commissions extremely challenging, if not nearly impossible.
In order to properly amortize commissions under ASC 606, businesses will have to answer the following questions:
- Can this cost be capitalized?
- If capitalized, what is the life: contract term or expected customer benefit period?
- If capitalized, what is the pattern of revenue we are trying to match?
After you identify the life of the commission cost, you must then determine the product type and revenue pattern that you need to match.
Finally, after you have mapped your costs to their commissions requirements, you’ll need to calculate an amortization table for each commissionable amount that requires capitalization.
Simple, right? The above summary of ASC 606 is like that time your college Physics TA told you that all you needed to know to get an A was remember that Force = Mass x Acceleration.
Let’s say you have 4 commission plans that require a benefit period of 3 years. That means you need to build 144 overlapping amortization tables!
CaptivateIQ has worked closely with CPAs to build a solution to help you adopt ASC 606 for both revenue and commissions calculations. And we know that our solution works because we were the ones calculating those hundreds of amortization tables before building CaptivateIQ!
Built with input from CPAs and ASC 606 experts
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Note: This content is for informational purposes only and should not be construed as financial, accounting, tax, legal, or compliance advice or guidance. Please consult a professional adviser for guidance on your specific situation.