As explained in part one, for businesses based on recurring revenue, complying to ASC 606 means recognizing your revenue from customer contracts along with  the costs incurred to obtain and fulfill them. 

But all of this seems easier said than done, right? So, how do you actually crack these standards in your accounting process and apply these revenue rules in your sales commissions?

Well, you’ll know the answers to it in 7 mins (that’s how long it takes to read this article).

In part two of the ASC 606 series, we would be talking about the specific accounting changes that every SaaS finance team should stick to while recognizing their sales commissions. Let’s dive in!

Understanding the Role of ASC 340-40 in Commission Costs

When ASC 606 was being rolled out by FASB(Financial Accounting Standards Board), the board also introduced a separate set of guidance (ASC 340-40: Other Assets and Deferred Costs) on how companies should account for commission expenses associated with their revenue contracts. This was added as a sub-topic under the existing ASC 340 standard.

ASC 340-40 covers amortization of assets arising from costs to obtain or fulfill a contract, and impairment of assets arising from those costs. This implies that businesses must now capitalize commission costs and amortize those costs over the life of the sales contract to match the timing of the revenue – a complicated, high-stakes task.

This sounds scary for SaaS companies because the commission impact is often more significant and requires a substantial amount of work than the revenue impact.

The Impact of ASC 606 and ASC 340-40 on SaaS Sales Commissions

With regards to sales compensation, ASC 606 requires finance to amortize commission expense for individual sales reps over the length of contracts.

Let’s take an example. Before ASC 606, if your sales rep sold a three-year contract and was paid $150,000 in commission, you’d be recognizing the entire $150,000 expense in the same year in which the three-year deal was sold. 

But, after ASC 606, you’d have to capitalize the $150,000 and amortize it over the three-year period of the contract. 

Simply put, you’d have to recognize your sales incentives over the period of service depending upon the customer contract and estimated lifetime. This completely alters the way you recognize the commission expense which is one of the biggest portions of CAC for your SaaS business.

Note: ASC 606 will NOT change the structure of sales compensation plans.

Treatment of SaaS Commission Costs with ASC 606 and ASC 340-40 

In order to follow ASC 606 and ASC 340-40 in your accounting activities, you should identify the costs that can be accounted for when incurred and which ones need to be capitalized.

Generally, the below-mentioned costs can be capitalized and amortized:

  • Sales commissions 
  • One-time SPIFs/bonuses related to sales
  • Fringe benefits related to the commission, SPIF, and bonus payouts

To provide you with a better understanding of the treatment of various commission costs, we’ve listed out a few cases along with a simplified decision-making workflow.

By now, you’d have acknowledged the necessary accounting changes based on ASC 606. And, the million-dollar question for you would be: What exactly needs to be done to ensure that your sales commission plans are ASC 606 audit-ready? 

Guess what? We’ve got you covered there as well.

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