As of the first of January 2018, new corporate accounting standards regarding revenue from contracts are in effect in the United States, as per the Financial Accounting Standards Board’s Accounting Standards Codification 606 (ASC 606). Most of the rest of the world is adopting the same principles through the International Accounting Standards Board’s IFRS 15.
A key focus of the new regulations is how revenue from contracts for the transfer of goods or services to a customer will be recognized for reporting purposes. Thus far, accounting regulations have allowed vendor revenue to be recognized when an internally designated event takes place. This could include performance – such as delivery to the customer or the completion of milestones – or simply the passage of time.
ASC 606 and IFRS 15 revise this practice with a fixed principle that revenue is recognized from a contract only when the customer gains control over the good or service provided; i.e., when the vendor satisfies its performance obligation. That can happen at a specific point in time (such as the delivery of physical goods) or over a period of time (such as in service contracts). But the definition of performance is becoming more complex in our increasingly online economy, with the growing role of software-as-a-service, always-on mobile apps, and subscription-based industries.
The Costs of Obtaining a Contract
In whatever way a contract defines satisfaction of a given performance obligation, ASC 606 applies similar new recognition standards to “the incremental costs of obtaining a contract with a customer.” This means that such acquisition costs must be deferred and amortized over any contract term longer than 12 months.
Included under the rubric of expenses incurred in connection with concluding a contract is incentive compensation, such as sales commissions, bonuses, SPIFs, and the like. The ASC 606 standards treat commissions paid on sales of subscription services and goods, for example, as deferred expenses to be amortized over the term of the contract. The objective of this alignment is to structurally link specific expenses and revenues to contractual obligations. However, since these rules are closely linked to specific contracts, incentive compensation paid based on other metrics (even overall sales team performance) may not fall under the new reporting standards.
An additional possible complication arising from the new revenue recognition standards is prior period adjustments. When a contract is changed or cancelled, how commissions paid or accrued are recognized under ASC 606 would change accordingly (e.g., commissions on a cancelled contract are to be written off). Managing such changes in incentive compensation records becomes a very resource- and time-consuming project in the case of multi-year contracts including intricacies such as variable service deliverables, floating terms and conditions, dynamic pricing, and the like.
As the ASC 606 standards make things more complex, the fact that over 50% of companies still handle incentive compensation using spreadsheets (according to a CSO Insights whitepaper) does not bode well. As a primarily manual process, it is very slow, difficult to manage, and there is a high risk of error.
In short, even as close as we are to the date the new standards go into effect, most vendors are unprepared for handling commission accounting.
Is Your Organization Ready?
If you’re using NICE Sales Performance Management (SPM), then it is.
NICE SPM incorporates our robust incentive compensation management (ICM) solution. It was designed with the built-in flexibility to adapt to changing and complex demands of all kinds, including detailed tracking of transactions and automated analytics.
NICE SPM is capable of collecting, managing and analyzing transactional and compensation data at the most granular level, with the fastest processing engine in the market. The NICE solution quickly identifies the compensation regime applicable to each contractual obligation, automates the most complex calculations, and applies the relevant amortization rules required by ASC 606.
Those same ICM capabilities are just as easily applied to retroactive transactions, such as prior period adjustments that may be necessary under the new accounting standards. The recorded transactional period or data, adjusted in response to contractual changes, triggers NICE SPM to automatically recalculate earnings across each period and apply the balance to the current period. For reporting purposes, the increase in earnings (along with the original earning figure) is stored. Prior period adjustments are therefore automated and the sales commission to be expensed in any given year, in connection with any particular contract, is clear and will comply with ASC 606.
Furthermore, NICE SPM will perform prior period adjustments for as long as required or, if needed, lock certain incentive compensation plans out of such retroactive calculations. This includes the capability to set a hard or relative date for the system to stop retroactive calculations altogether or in part.
Whatever our client’s needs, NICE SPM implementation teams help them determine the most efficient ways to comply with industry regulations, such as ASC 606, and then configure the solution accordingly. This relieves the burden on corporate accountants to double check all allocations of commissions and other direct contract acquisition costs, as system customization and automation will ensure that amounts, calculations and capitalizations are complete and accurate.
An Integrated System
Part of what makes NICE Sales Performance Management capable of meeting all manner of regulatory requirements, across industries, is its integrated management of sales compensation, territories, quotas and forecasting. The NICE SPM platform provides real-time visibility into sales performance, which it leverages for improving payment accuracy and agility, reducing operational costs, and accelerating planning. That is why market leaders such as Coca Cola, Royal Bank of Canada (RBC), and Subaru have chosen NICE SPM to optimize their sales performance management processes.
In the enterprise-class NICE SPM solution, a best-in-class calculation engine handles complex incentive compensation plans, the largest data volumes, unique business rules, and diverse organizational structures and hierarchies. Unmatched system performance and scalability delivers real-time reporting, including ‘in-cycle’ for both actual and forecasted incentive compensation data, while process automation streamlines plan distribution and approval, and quota and dispute management. A purpose-built unified platform brings it all together to manage the entire SPM cycle, end-to-end, with a powerful workflow engine and customizable templates.
Every NICE SPM customer can already take advantage of those comprehensive capabilities - so they won’t be caught unprepared in the future.