ASC 606 Compliance: Mastering Sales Compensation the Easy Way

The new ASC 606 revenue rules are causing finance teams to rush to update processes. And it is affecting sales compensation plans as well. Adapting to ASC 606 can be tough, but it does not need to be stressful. This article offers tips for an easy transition. Even when ASC 606 seems complicated, these tricks will help you master sales compliance in no time.

What Is ASC 606 Compliance

ASC 606 or the Accounting Standards Codification, is the new revenue recognition standard that took effect in 2018. ASC 606 is a detailed set of rules made by the Financial Accounting Standards Board (FASB). ASC 606 brings a new way to recognize revenue. It focuses on consistency across industries. It guides companies in recording and discussing their earnings in financial statements. Companies must recognize revenue once they transfer goods or services to customers.

Five-Step Model

The standard outlines a five-step model for recognizing revenue:

• Identify the contract(s) with a customer.
• Identify the performance obligations in the contract.
• Determine the transaction price.
• Allocate the transaction price to the performance obligations.
• Recognize revenue when (or as) the entity satisfies a performance obligation.

Key Changes

ASC 606 brings several significant changes compared to previous revenue recognition standards:

• Emphasis on control: Companies must recognize revenue when customers get what they paid for, not when ownership changes.
• More detailed disclosure requirements: Entities must give detailed information. This includes how they recognize revenue, contract balances, what they promise to do, and the decisions they make.
• Impact on various industries: ASC 606 affects a wide range of industries. Some of them include software, telecommunications, construction, and manufacturing, among others. The new standards change how they recognize revenue from contracts with customers.

Transition Challenges

Transitioning to ASC 606 can be tricky for sales compensation. Existing plans may need significant changes to comply with the new rules. Collaboration between finance, sales, and HR is crucial to adjust plans as needed.

The key is to understand the changes in revenue recognition under ASC 606. Companies need to update sales compensation plans accordingly as well. By doing so, businesses can follow the new standard and reward their sales reps accurately and ethically.

Key Challenges of Achieving ASC 606 Compliance for Sales Compensation Plans

ASC 606 compliance introduces complex challenges for organizations in redesigning sales compensation plans. Here are some:

Lack of Historical Data

Under ASC 606, companies have to estimate the total contract value. They need to recognize revenue over the life of long-term contracts as well. But many companies do not have enough past data to figure out the exact total contract value.

Changes in Quota Setting

The new standards require companies to set quotas. Companies need to pay bonuses based on the estimated contract value, not just the invoiced amounts. This requires a major shift in how companies set quotas and calculate compensation. Sales teams need to get used to this new way of setting targets for sales.

Managing Sales Team Expectations

When companies switch to using new revenue recognition standards, it can make a big impact on how sales representatives get paid. Companies need to inform their sales teams about these changes so everyone is on the same page. Salespeople may see some changes in their pay, so companies need to make sure they are ready for that.

With good planning and communication, companies can tackle these challenges and switch their sales pay plans to follow ASC 606. But a piecemeal approach will likely create more problems. The key is to take a holistic view of how the new standards impact all aspects of sales compensation.

How to Design a Sales Compensation Plan That Ensures ASC 606 Compliance

Designing a sales commission plan to meet ASC 606 standards requires careful consideration. It must motivate salespeople to close deals in line with ASC 606's 5-step revenue recognition model.

Understand ASC 606

Understanding the new set of rules is the first step. Complying with the new standards is easier with clear rules. Make sure you understand the key principles and requirements. This will prevent mishaps in making an effective sales compensation plan.

Avoid Complex Compensation Plans

Keep your sales compensation plan as simple as possible. Complexity can lead to confusion and potential non-compliance with ASC 606. Clearly define the performance metrics that will drive sales compensation. Link the metrics to the delivery of goods or services to customers, in line with ASC 606 requirements.

Focus on customer commitment

Companies must tie sales compensation to securing customer commitments, not just finalizing contracts. ASC 606 recognizes revenue only when a customer commits to a deal.

Align payout timing

Make sure that salespeople get paid their commissions based on when the company makes the profit, not only after the sale. When a big sale takes several years to bring in all the money, then the salespeople must get their commissions over that same amount of time. Lump sum payouts for such deals will not comply with the matching principle under ASC 606.

Cap payouts

Limiting how much salespeople earn can stop them from overpricing to get more money. These limits set a fair boundary on earnings, even for huge deals. They push salespeople to care more about making good deals that make profit, rather than just closing the biggest deals they can.

A good sales compensation plan that follows ASC 606 rules boosts sales teams and cuts risks. Paying for hitting targets at the right times and with the right money is crucial. Putting limits on payouts and giving some pay upfront can push for good, profitable deals.

Conclusion

With the right plan and tech, dealing with ASC 606 rules does not have to be a nightmare for sales pay. Just understand the standard, review contracts, and use automated software for revenue recognition. Make sure your systems are set up right to handle the math smoothly in the background. Time is ticking, so get ready now to tackle ASC 606 without stress. Companies that get ready early will be set up for success when the new rules kick in.

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