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ASC 606 Solutions

Revenue recognition under ASC 606 isn’t something you can understand in a few minutes or even a few hours. This complex guidance requires time, patience, and practice to truly understand.

Learn more about ASC 606 to comply with the revenue recognition standard set under ASC 606. This page contains an archive of our favorite ASC 606 resources. It also provides you with some basic background information about ASC 606, revenue recognition, and commission expensing.

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General Questions About ASC 606

What is ASC 606?
 

At the most basic level, ASC 606 standardizes revenue recognition. This means, as a business, accurately documenting the transfer of promised goods or services to customers over time.

Before ASC 606, there were many methods companies used to report revenue. The lack of a uniform standard made it difficult to compare financial statements between companies.

Because of this, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) created ASC 606. The goal was to give companies a framework to recognize revenue and to standardize accounting across industries. This means, under ASC 606, financial statements are now more consistent, comparable, and generally more useful.

What type of businesses are impacted by ASC 606?
 

This new revenue recognition standard affects all businesses that enter into contracts with customers to transfer goods or services. This includes public companies, private companies, and non-profit organizations. Both public and privately held companies should, as of 2022, be ASC 606 compliant.

How did ASC 606 change revenue recognition?
 

Prior to the rollout of ASC 606, different industries relied on different standards. Now, many long standing industry guidelines have been replaced with ASC 606. Among them were several regulations that had historically been a part of US generally accepted accounting practices, or GAAP.

Now, under ASC 606, most industries are expected to follow a standard framework that spans many types of businesses. This framework includes five steps:

  • Identify the contract
  • Identify the performance obligations in the contract
  • Determine the transaction price
  • Allocate the transaction price to the performance obligation in the contract
  • Recognize revenue when, or as, the entity satisfies the performance obligation

Although this framework may appear relatively simple, ASC 606 changed many aspects of business accounting. To comply with ASC 606, finance departments must be tightly aligned with other departments within their companies. Everything from product roadmaps, to GTM strategies, to compensation planning, to sales commission, to HR policies are impacted by ASC 606.

How should businesses account for commissions under ASC 606?
 

The accounting rules under ASC 606 have a big impact on sales commissions. These standards state that any sales commission associated with a contract must be capitalized as an asset and amortized over time.

This requirement is more complex than you may think. Think about the incremental costs related to securing a contract that you may not always be immediately aware of. This means, the amortization period for commission pay isn’t always the same as the contract period. There are a few considerations, that impact when and how you handle sales commissions under ASC 606:

  • Commission expenses can continue to be recognized when incurred if the determined amortization period is one year or less.
  • If a contract is more than a year, you must take a different course of action. In this case, expenses must be amortized for individual reps over the course of the estimated customer lifespan. Any indirect or rolled commissions will continue to be recognized immediately regardless of the determined contract term length.
  • Every time a rep sells to the same customer, you must evaluate if that transaction extends the customer’s life expectancy. For each additional commission payment, you must be able to quantify the impact of the transaction on customer life expectancy.
  • Depending on your industry, you may have to calculate commission at different levels to determine the correct commission expense values. These levels may include the customer, contract, and product level.

 

Instead of simply recognizing commission expenses when they’re earned to offset gross revenue, businesses must now track far more granular details. Under ASC 606, it has become nearly impossible for businesses to manually calculate commission expense reports in a spreadsheet.

Ensure Your Sales Commission Program is Audit Ready

ASC 606 represents a fundamental shift in how commissions are accounted for, tracked, and reported. Excel is no longer a viable option for most because commissions may need to be tracked and reported for several years.

Here is our ten-step guide to understanding and getting compliant with ASC 606 for commissions.

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The Impact of ASC 606 on Critical SaaS Metrics

One of the primary metrics SaaS companies look at as they prepare to go public or raise additional funding is CAC. Recently, however, ASC 606 dramatically changed how companies look at and recognize a major component of a company’s CAC.

This has far reaching implications. If you’re not prepared to speak to the changes introduced by ASC 606, you might be caught off guard.

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ASC 606 Compliance: Choosing a Commission Expensing Solution

ASC 606 compliance is kind of like taking a cross-country road trip without a GPS. It’s a difficult process. Without following a set of complex directions, you run the risk of getting lost.

Even though you’ve got the same map, your vehicle will ultimately determine your speed, efficiency, and ease of travel.

Keep Reading

 

 
 

Spiff is simply malleable from implementation to data articulations and can accommodate even the most complex of commission structures. Love what it is, and excited to see what is to come.

Brian Orr
Brian Orr
VP of Finance and Corporate Controller
Greenix

Spiff is the only commission expensing automation platform.

Manually tracking commissions or using a legacy system, presents complex challenges during auditing. Moving commission data from one system to another is time-consuming and prone to human error.

Fortunately, there’s an easy solution for commission expensing under ASC 606.

Spiff automatically pulls data from existing systems and applies commission rules for you. Then, with just a few clicks, you have an ASC 606 compliant report. This automated process reduces error and improves the accuracy and efficiency of your finance teams. Here are some key features:

 
 

We integrate with the tools you already know and love!

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More About Spiff & ASC 606 Commission Solutions

1
How does Spiff handle fringe benefits tied to commission expenses?
 

In addition to more typical commission expensing scenarios, Spiff allows users to include estimated fringe benefit amounts in capitalization and amortization. We simply ask you to assign an estimated value to the fringe benefit and we’ll include it in the calculation.

Example: Say you offer 401k matching on each commission that amounts to roughly 4% of the total commission. Spiff will take the commission amount multiplied by the estimated percentage (4% in this example). Then, we include that amount as part of the commission expense report along with the corresponding journal entries.

2
What amortization options does Spiff offer?
 

Spiff allows users to expense commissions immediately, expense evenly over a given period of time, or we offer dynamic amortization. The last option allows you to specify any function or field. Then, Spiff uses that to adjust the schedule for each commissioned amount. Other options, if needed, include the ability to choose between practical expedient or different proration schemes (either even or daily).

3
How does Spiff know which dates to use for amortization and capitalization?
 

Spiff connects directly to your data. This allows us to use your native objects and fields in the determination of capitalization or amortization dates. We can also use normalized dates within the platform such as the at which the commission was calculated.

4
What information does Spiff provide in an expense report?
 

An expense report generated by Spiff includes the following information:

  • account names
  • asset names
  • asset identifiers
  • related commission plan
  • related commission payout rule
  • statement period in which it was paid
  • journal name
  • journal number
  • expense type
  • entry type
  • period of benefit
  • capitalization date
  • capitalized amount
  • amortized amount to report run date
  • expense effective date and end date
  • payees
  • currency code
  • amortization amounts by period