Commission accounting looks different than it used to now that ASC 606 is in effect. One of the biggest changes has to do with estimating and accounting for amortization.
In this article, we’ll briefly explain how amortization works, examine what sales commission accounting used to look like, consider the changes under ASC 606, and talk about how to remain ASC compliant while amortizing sales commissions.
Amortization is the act of spreading the costs of an intangible asset or loan over the duration of the lifetime of that asset or loan. For example, if an operating license costs $150 and lasts for three years, the amortization for the expense would be $50 per year.
Software, trademarks, licenses, copyrights, and patents are all examples of intangible assets for which companies need to report amortization expenses.
ASC 606 introduced a few key changes to the accounting process for sales and commissions incentives. We’ll take a look at how it used to work and compare that to what it looks like under the new 5-step revenue recognition standards.
Before ASC 606, businesses accounted for commissions as direct expenses. This meant that sales commissions, bonuses, and incentive pay for staff and contractors could all be calculated and directly expensed at the end of the year or reporting period. It was a fairly straightforward process that has now become a bit more complicated.
With the new revenue recognition standards in effect, companies must report intangible assets as forecasted estimates. Then throughout each period, they need to account for those estimates as they evolve based on performance and company spending.
Failure to comply may be perceived as earnings management or “cooking the books,” and the Securities and Exchange Commission (SEC) issues fines for this type of financial records manipulation—whether it was done intentionally or not. In some cases, businesses may even go under as a result of the punitive measures.
Note: Earnings management should not be confused with an On-Target Earnings Model, which is intended to help companies stay on track.
Accountants will see two key changes to the way they calculate commissions and similar expenses.
This also necessitates some changes to accounting journals. Monthly journal entries prior to ASC 606 were simple:
|
Account Name |
DR |
CR |
|
Sales commission expense |
$xx,xxx |
|
|
Bank account balance |
$xx,xxx |
The new process requires an additional two steps each month. The following example assumes a 36-month amortization period.
|
Account Name |
DR |
CR |
|
Asset |
$total commission payable − $total commission payable / 36 |
|
|
Sales commissions expense |
$total commission payable − $total commission payable / 36 |
|
Account Name |
DR |
CR |
|
Sales commission expense |
$total current asset value / 36 |
|
|
Asset |
$total current asset value / 36 |
There are two main schools of thought on the appropriate length of amortization periods for SaaS and other subscription models:
Companies that use longer amortization periods experience less-frequent disruptions in this portion of their accounting. But those that use shorter periods have a more accurate picture of true amortized assets. And due to the nature of SaaS, three years is often enough time for the product to have evolved into something completely new.
With the introduction of ASC 606, revenue recognition became more complex. Businesses must account for the amortization of sales commissions, rebates, and sales incentives, along with performance obligations and other qualitative elements in revenue recognition.
All these added complexities make it easier than ever to introduce human error into your calculations—especially if you’re relying on a sea of spreadsheets for sales compensation. But there’s an easier way.
Performio automates much of the sales commission calculation process, keeping you effortlessly ASC 606–compliant while easing the calculation of estimated commissions expenses, reducing the risk of accounting errors, and reducing the time it takes to fix errors.
Our enterprise-grade ICM was built by sales comp experts for sales comp professionals. For more than 15 years, we’ve helped hundreds of sales teams in dozens of industries, striking the perfect balance between flexibility and ease of use.
We love helping businesses reduce the pain of calculating and accounting for sales commissions, freeing them to spend more time growing and serving their customers.
Request a demo today, and see what Performio can do for your business.