ASC 606 & IFRS 15: A new accounting standard
Let’s face it, nothing stays the same. It's true, and no one understands change better than the accounting professional. There are new regulations introduced on a frequent basis and accountants need to remain informed and responsive to ensure your organization is compliant with generally accepted accounting principles (GAAP).
The new Accounting Standards Codification (ASC) Topic 606: Revenue from Contracts with Customers, otherwise known as the ASC 606/IFRS 15 accounting standards, is a collaboration between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) that updates revenue recognition methods so they no longer differ between their organizations. In short, the new ASC 606 and IFRS 15 accounting standards bring significant change.
Is your organization ready for the new ASC 606 and IFRS 15 accounting standards?
The new ASC 606 and IFRS 15 accounting standards, introduced for both public and non-public organizations, have implications for organizations reporting financial statements under generally accepted accounting principles (GAAP).
Subtopic 340-40, which is also referenced as the “cost of obtaining a contract,” is a small part of the overall ASC 606 and IFRS 15 accounting standard; however, it becomes critically important for organizations reporting revenue recognition and sales compensation in a SaaS/cloud or subscription-based model. Under the new ASC 606 and IFRS 15 accounting standard, companies with a SaaS/cloud or subscription-based model will need to capitalize sales commissions at the time of the sale and expense them in a disciplined way over time.
If you don’t feel ready for the new ASC 606 and IFRS 15 accounting standards, you’re not alone. Many organizations are still trying to figure out how they are affected and don’t know where to begin.
Get started: Understand incentive compensation plans
To better understand the impact of the ASC 606 and IFRS 15 accounting standards, sales leaders, compensation administrators and finance team must gain a deep understanding of how and why the compensation plans were implemented in the first place. This can be puzzling given the number of compensation plans, various sales roles and different mechanics within each compensation plan.
The finance team will likely find themselves working in new territory given that the ASC 606 and IFRS 15 accounting standards are not black and white. The new standards are principle-based and require finance professionals to make judgements to account for sales compensation. They'll rely on the sales leaders and compensation administrators to advise them.
Develop a plan to address ASC 606 and IFRS 15 accounting standards
With the deadline looming for organizations to address the ASC 606 and IFRS 15 accounting standards, it’s important to have a plan in place. Start by meeting with your accounting team to determine what transaction types need to be evaluated and how data needs to be presented.
The accounting teams will need you to organize your transactions based on how they will capitalize and amortize each type. For example, transactions for new customers may need to be handled differently than existing contract add-on sales. You’ll need to know how your transactions will be broken down before you make any changes to reports or calculations. And, since the ASC 606 and IFRS accounting standards require organizations to recalculate compensation for 2016 and 2017, there will be significant effort required for those organizations that haven't had a compensation system in place or are using spreadsheets to manage the compensation plans.
While the additional reporting requirements can seem daunting, advanced planning can make this a manageable endeavor.
- Look at existing data. Determine what fields are missing and create a template for your new reports based on guidance from your accounting team.
- Identify and locate missing data. Make a note of the tables and fields that contain the information you need. If the data doesn’t already exist in your model, find out where it’s located.
- Determine who is responsible for additional data. If data is needed that doesn’t exist in your model, ensure that you know who’s responsible for obtaining that data and develop a plan to import the new information into your compensation model.
- Create new financial reports. Implement your calculation changes and create new reports. Once you know what your accounting department needs, you can start to look at your data to include additional information such as customer, product and contract details.
Meeting new reporting requirements for contracts revenue reporting has a huge potential impact on the organization. IBM Incentive Compensation Management can help facilitate this process and increase the productivity of both the compensation management and accounting teams. With IBM Incentive Compensation Management, organizations can more easily address risk and compliance concerns, and enhance reporting to meet the new ASC 606 and IFRS 15 accounting standards.
Download these resources to learn more:
- Accounting for Sales Compensation becomes even more challenging under ASC 606 and IFRS 15
- Finance and Sales Leader: New Revenue Recognition Rules Bring Changes for Sales Commission Accounting