In 2018, Adobe performed accounting acrobatics by adopting new rules that capitalized $413 million of commissions that they had previously expensed. This change was the result of a new set of accounting standards introduced in 2014 that impacted how revenue and some related costs are recognized by all companies.
So what changed?
A set of new standards called ASC 606 completely changed the way companies account for revenue and related sales commissions. Some consider ASC 606 to be the biggest change in accounting standards in the last 100 years. (Exciting! But we still recommend you read the following post with coffee in-hand!)
Under ASC 606 ( also including related changes to ASC 340 ), companies not only have to modify how they recognize revenue, they must now include certain costs related to capturing that recognized revenue. For many businesses, those costs include sales commissions and now, businesses must capitalize certain commission costs and amortize those costs over time to match the timing of the revenue recognized. For some companies (like SaaS companies), the accounting changes for sales commissions have a bigger impact than the changes for revenues.
Companies are required to adopt these rules at different times (but can elect to do so earlier):
US public companies for fiscal years starting after 12/15/2017
US private companies for fiscal years starting after 12/15/2021 *
International companies that report under IFRS for fiscal years starting on or after 1/1/2018
Be sure to check with your accounting department to ensure that you have met the appropriate deadlines. If you're a private company, your accounting department should have recently completed or is in-process of completing its initial assessment with these new rules.
*On May 20, 2020, the FASB voted to extend the deadline by one year from 12/15/2020 to 12/15/2021.
In order to meet ASC 606 requirements and amortize commissions, companies are now forced to disaggregate much of their data. The explosive growth in data volume makes manual management of commissions extremely challenging, if not nearly impossible.
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 disaggregate its data to show multiple products with differing revenue patterns (such as up-front revenues for on-premises software and overtime revenues for post-contract support). This may require breaking down commissions calculations to the contract or product level, or a reasonable estimation method to disaggregate the commission amounts.
In order to determine how to treat specific types of commissions costs, your team needs to assess three factors:
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?
Here are some common types of commissions and how they are treated:
After you identify the life of the commission cost, you then consider the pattern that you need to match. Here are some common examples:
You may be an Excel wizard, or perhaps you like mixing cake batter by hand rather than with an electric mixer because you love a good challenge. If that’s the case, you may feel that managing ASC 606 calculations is a piece of cake (that you just made with hand-mixed batter). After all, if you have four commission plans that require a benefit period of three years, that's only 144 overlapping amortization tables that you need to build.
However, for those of you who would like to save yourself the hassle of creating hundreds of amortization tables, CaptivatelQ has built a CPA-designed solution to help you adopt ASC 606 for both revenue and commission calculations. And we know that our solution works because we were the ones calculating those hundreds of amortization tables before building CaptivatelQ!
Produce ASC 606 ready reports directly from our platform built by accounting experts.
Take either the Asset approach or Portfolio approach, and make calculations in multiple currencies.
Save hundreds of hours with automated asset roll-forward reconciliations and journal entry support.