Demystifying ASC 606 and IFRS 15 Compliance for Sales Comp

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Demystifying ASC 606 and IFRS 15 Compliance for Sales Comp

The new revenue recognition standards ASC 606 and IFRS 15 are creating massive headaches for sales leaders. Compliance with these standards requires changes to how companies calculate and pay the sales teams.

The thought of revamping their sales pay plans to meet ASC 606 and IFRS 15 requirements is daunting. But it does not have to be. With the right approach and resources, companies can update their pay plans without disrupting processes or demotivating their sales teams. The key is to understand the impact of ASC 606 and IFRS 15 on sales pay, identify necessary changes, and implement them systematically.

Understanding ASC 606 and IFRS 15

To comply with ASC 606 and IFRS 15, companies must understand how revenue recognition has changed. These new standards require companies to recognize revenue upon transferring goods or services. The amount must reflect the expected consideration. ASC 606 and IFRS 15 identify five steps for recognizing revenue:

Identify the contract with a customer.
Identify the service commitments in the contract.
Determine the contract price.
Allocate the contract price to service commitments.
Recognize revenue when the service commitments are satisfied.

Meeting these new guidelines often requires updating sales pay plans. The new standards allow for earlier or overtime recognition of revenue, impacting commission pay outs. Sales representatives may need to provide additional details to support revenue recognition.

With preparation, companies can successfully shift to ASC 606 and IFRS 15 compliance in sales pay. This includes educating representatives on the new guidelines and updating sales pay plans to align with the five-step model. It also involves implementing the appropriate revenue recognition rules and ensuring representatives provide the details needed to recognize revenue.

Companies can feel confident their sales pay plans meet these new standards with the right approach. It motivates the sales team while providing the finance team with information they need to accurately report revenue.

The Impact on Compensation Calculation and Reporting

Sales pay plans will require adjustments to comply with the new ASC 606 and IFRS 15 revenue recognition standards.

Under the new guidelines, companies can recognize income only when they transfer control of promised goods or services to customers. This means pay tied to income targets may need to shift to align with the new timing of revenue recognition.

It will impact pay reporting as well. With the new standards providing more transparency into revenue recognition, pay reporting must reflect the same level of transparency. Pay statements will need to include details such as:

Service commitments and timing of revenue recognition
Estimates and judgments made in determining revenue
Constraints on variable consideration

The good news is software and processes can handle the complexity involved in revenue recognition and pay management. These systems can provide the necessary transparency and adjust pay calculation methods to suit the new guidelines.

While compliance with ASC 606 and IFRS 15 requires changes, the basics of good pay plans remain the same. The most effective plans align pay with performance, drive the right behaviors, and keep top talent motivated. With well-designed pay plans in place, companies can smoothly shift to the new revenue recognition standards.

Case Study: Software Provider—Questions to Ask

Ensuring ASC 606 and IFRS 15 compliance in a software provider’s sales pay plan requires asking these questions:

How are software license/contracts structured? Do they provide the customer with a 'right to use', recognizing revenue at a point in time? Or is it a 'right to access,' with revenue spread over time for ongoing updates and support? This will determine whether to recognize at once or ratably.
How long are the contract terms? Renewal terms? It impacts the contract period for revenue recognition.
Are there options to buy additional user licenses or services? This can represent separate service commitments with different revenue schedules.
Are any discounts or concessions offered for renewals or multi-year contracts? This affects transaction price allocation across the contract period.
How are sales representatives paid?
Is pay based on signing new customers or renewing/expanding existing customers? This must align with revenue recognition.
Are accelerators or higher commission rates offered for multi-year deals? If so, the commission plan may need adjustment to match pay expense with revenue recognition.
Are commissions paid out at once upon contract signing or over time upon revenue recognition? The latter approach is better for ASC 606/IFRS 15 compliances.

By analyzing and adjusting software contracts and sales pay, companies can ensure compliance with the new revenue recognition standards. With the right questions asked, they can align their accounting practices and sales incentives.

ASC 606 and IFRS 15 are complex standards. By breaking them down into straightforward steps, sales companies can achieve compliance without too much hassle. The key is starting early, documenting thoroughly, and working with other departments. Change is uncomfortable. But adapting processes to align with the new revenue recognition rules provides greater transparency and accuracy in financial reporting.

With the deadline looming, the time for stalling has passed. By tackling each requirement thoroughly, sales companies can shift to the new standards seamlessly. Following a practical approach will help demystify compliance and ensure the company is ready for the new era of revenue recognition.