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Revenue Recognition Compliance: Don’t Forget About Sales Commissions

The new revenue recognition standard (ASC 606) is now in effect for both public and private companies. A massive restructuring of previous rules, the standard has taken significant time for companies to comply, particularly given its length and intricacies. In addition to ASC 606 — which details how companies need to recognize revenue — a new subtopic was added to ASC 340 to provide further clarification on accounting for costs incurred as part of obtaining or fulfilling a contract.

Notably, this information is critical to companies who provide sales commissions and could leave businesses non-compliant if overlooked.

How Do Sales Commissions Apply Under ASC 606 and ASC 340-40?

Under the new standards, incremental costs of obtaining a contract need to be capitalized if a company expects to recover those costs. Incremental costs are considered such if they would not otherwise be incurred without a contract being executed. Sales commissions, for example, are only paid as a result of a contract being signed, therefore, they are considered incremental costs.

How Do Affected Companies Comply?

Incremental costs, which most companies previously expensed as incurred, now need to be considered for capitalization and subsequently amortized for financial reporting purposes. Amortization occurs over a company’s benefit recovery period for such costs and significant management judgment is often required to determine an appropriate amortization period. Amortization periods of less than a year allow for costs to be incurred as expenses rather than capitalized costs.

The technical accounting process itself requires access to significantly more data than was previously required, laying an additional burden on financial and accounting staff at affected companies. In addition to modifying procedures to meet revenue recognition standards, companies will need to make internal adjustments and/or increase outsourcing resources to allow for making adjustments and judgments and managing amortization schedules and entries.

Who Does This Impact?

These accounting provisions impact companies who pay commissions or other costs incremental to obtaining contracts (e.g., contingent legal fees) and are also subject to U.S. GAAP compliance standards.

If your company issues sales commissions or incurs other incremental costs to obtain a contract and is subject to GAAP, the time to comply is now. Technical accounting experts at The MFA Companies® are well-versed in the intricacies of ASC 606 and ASC 340-40 and can work with your team to ensure compliance. Please reach out to learn more about how we can help.

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