A new guideline called the Revenue Recognition Standard has recently enforced a major change in accounting standards across businesses in the U.S. Many companies are not prepared for a critical part of the standard, known as “subtopic 340-40.” It is also commonly known as the cost of obtaining a contract. While this part is small in and of itself, it is very important for companies that pay commissions and need to be in compliance with GAAP.
It is interesting to note that, “Over 80 percent of organizations say they must make changes to support commission expense accounting requirements for GAAP compliance, yet only about 20 percent have started to do so.”
Some of the guiding steps to help businesses manage commissions under ASC 606 include:
#1 It is important to educate the team and help them to understand the objective behind sales commissions.
#2 To ensure requirements are met, businesses must capture the finer details of commissions and ensure all details are accounted for.
#3 To ensure effective implementation, the accounting team must be educated about sales commission strategies that will support the overall commission decisions.
#4 According to the new standard, any amortization should be system based and in line with the transfer of goods or services to the customer. This requires accounting to compute the commission costs across time.
#5 Since each business will be responsible for capturing, tracking, and recording detailed report on commissions, it must also look at incentive plans.
If your company manages commissions on a daily basis and wants to ensure compliance with the new standard, click the link below for more information.