The accounting concept of revenue recognition seems a bit disconnected from that of sales commissions. However, due to changes to the Revenue Recognition standard, many organizations have had to educate themselves quickly on the issue.
Rules for handling commissions (under the new Revenue Recognition standard) are quite different from what they used to be. The new Revenue Recognition standard is designed to better align financial reporting with international practices. It also promotes a unifying concept for reporting revenue promoted by the FASB (Financial Accounting Standards Board).
The new standard impacts various costs associated with contracts – legal fees, preparation costs, etc. More importantly, the new standard directly impacts sales commissions. Companies which pay sales commissions must take note of the following changes in order to remain GAAP compliant.
Commission Tracking Accuracy
Previously, keeping track of order / transaction crediting at the representative level (in aggregate) was good enough. Following the new standard, it is now necessary to relate commissions to individual transactions (ex: orders, deals, contracts). In addition, accounting records should allow tracking of commissions on a per-customer basis.
Commissions Expense Timing
Previously, the schedule used to expense commissions was simple. Typically, it happened when the commission was paid out. With the new standard, commissions need to be expensed over a time period matching the delivery of services to customers. Logically this makes sense, but there is an additional administrative burden.
Capitalizing Commission Costs
In most companies, commissions were capitalized when deals were won and service delivery completed. With the new standard, additional accounting efforts are required because the cost of commissions must be capitalized as an asset. This can even require some complex estimation effort from accounting.
This was a brief overview – for more details, click here. If you aren’t yet following the new standard, don’t wait. Not following these rules threatens your ability to remain GAAP compliant. One thing which is clear however is that outdated methods for calculating sales commissions are no longer “good enough”. Those old-fashioned commission spreadsheets don’t provide the level of detail accounting departments need to do their jobs.
The good news is that some commission management solutions support advanced reporting – for example the ability to sync all commission-related data to enterprise solutions such as Tableau or Microsoft Power BI – enabling advanced reporting & analysis. Welcome to sales commission automation!