Whether you’re part of a Medicare FMO, or an independent agent, one thing is certain – the only dependable constant within our industry is change. This is especially true when it comes to legislation, and in the wake of the global pandemic, this factor has increasingly been thrown into the spotlight.
When it comes to adapting and responding to legislative changes, there is, of course, an increased burden upon our profession. But with legislation adapting to help increase protection – be that for customers, from predatory behavior in the market, or to improve the operation of businesses themselves – it’s necessary to accommodate this additional change.
One of the biggest changes that Medicare FMOs have needed to be cognisant of in recent years, from an accounting standpoint, came in the form of ASC 606.
What exactly is ASC 606 and what is its potential impact upon the Medicare insurance industry? In this article, we’ll explain all…
What is ASC 606?
When Accounting Today referred to ASC 606 as the “biggest change to the accounting standards in the last 100 years” they could hardly be accused of hyperbole. The result of collaborative development on the part of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), the ASC 606 underwent a somewhat complicated birth, with multiple Accounting Standards Updates (ASU) issued as it closed in on its goal – the ability to recognize revenue more consistently.
At its core, the ASC 606 represents a standardization framework for financial reporting that delivers clarity for investors and customers alike. The ASC 606 aims to transform business for the better by creating a standardized reporting framework that works across all industries and industry incumbents.
Who’s impacted by the changes? All public businesses and organizations that entered into contracts or sales agreements with customers from the fiscal year after December 15, 2017 onwards are affected by ASC 606. As of 2019, this applies to both private and public sector business, as well as profitable and non-profit institutions. Essentially, if you sell goods or services, the ASC 606 framework applies to you.
The ASC is especially important to businesses that run on a subscription basis, as it takes into account the full lifecycle of a customer. This means that costs incurred by them at each of these stages such as add ons, upgrades and downgrades etc can all be factored in.
The 5-Step ASC 606 Model
1. The 5-Step ASC 606 Model
This initial step outlines the criteria that must be met when a contract is entered into between a company and a customer. This doesn’t necessarily need to be a signed contract – any contract with enforceable rights and obligations can be counted. The essential parts of any contract are:
- All parties have approved the agreement
- All parties are committed to fulfilling their obligations
- Each party’s rights are identifiable
- Payment terms are identified
- The contract has commercial substance
- Collectibility is probable
2. Identify the performance obligations in the contract.
The second step determines the expected performance requirements within the contract. Again, performance obligation merely denoted a promise to transfer goods or services to the customer. In order to determine this, distinct services need to be identified as having been promised to the customer. A good or service is distinct when
- The customer can benefit from the actual good or service
- It can be transferred independently of other performance obligations in the contract
3. Determine the transaction price.
Next, the price associated with the business supplying products or services to the customer must be determined. This transaction price relates to the cash and non-cash consideration that an entity is entitled to receive from the customer. It also factors in any variable considerations such as price concession, volume discount, and rebates to be estimated upfront.
4. Allocate the transaction price.
This step outlines how the price is allocated across the various obligations of the contract. If the product or service delivery is recurring in nature, then a continuous performance obligation can be said to be in place. To accommodate this, the seller can split the total amount of consideration to be recognized as revenue for each performance obligation.
5. Recognize revenue when or as the entity satisfies a performance obligation.
Finally, this step specifies how revenues will be recognised, as well as when they will be recognized (i.e when the performance obligation is fulfilled!)
The Impact of ASC 606 Legislation
Although pushed through with the intention of simplifying revenue recognition, the new ASC 606 standard poses a particularly difficult challenge for subscription based companies, such as FMOs within the Medicare sales industry, as they can encounter challenges at each step.
Typically the most common challenges encountered related to the following two factors:
- Subscriptions change often
Occurrences like upgrades, downgrades and early cancellations all have impacts on the business’s revenue and therefore can have considerable implications in the reporting process. - Contracts are complex and occur over time
Because these services are billed on a recurring monthly, or annual basis, the revenues can’t be reported at once as the business has not yet delivered the specified service, and must be deferred over the length of the contract.
Taking telecoms giant Verizon as an example, we can see how subscription based businesses can run into difficulties in their quest for compliance. Although the company began working towards ASC 606 compliance several years in advance of its full impact, it still needed to entirely reprogame its software to accommodate new ways of accounting for revenue. While a compliant solution was accomplished, it was costly – in terms of investment and time spent by their tech and finance teams. Many other businesses found themselves in a similar situation.
What does ASC 606 mean for FMOs?
ASC 606 is about more than recognizing revenue. ASC 340-40, a subtopic of ASC 606, sets out standards related to the costs incurred in order to obtain and fulfill signed contracts. Commissions are one such cost.
Previously, commission costs were recognised within the period that the contract was executed (i.e. in the period in which they were incurred.) This allowed the company to offset any revenues. Under the new legislation, all commissions and compensation have to be tracked at the level outlined by the law.
This means that error-prone spreadsheets and complex macros place a great strain on the time and resources of the company due to their inefficiencies. Additionally, it is very difficult to track the flow of data from the required level of detail to the commission expense.
That is why a commission tracking tool such as Commissionly is the perfect partner to help create efficiency within the operation and streamline the new reporting process. In order to stay compliant with the updated ASC 606 requirements, your accounting department needs to be able to depend on data that is accurate and current.
Formulas and manual processes have the capacity to get a lot more complicated, and as a result, the benefits of automation and improved collaboration that Commissionly offers represent a real lifeline, rescuing your team from burnout.
ASC 606: Smooth Future Sailing For FMOs
The demands of ASC 606 hold a number of serious implications and ramifications for all contract based businesses, however due to their nature, subscription-based businesses balancing commission-based payment structures, such as Medicare sales, have a greater challenge on their hands.
Nothing in financial legislation stays the same for long – and as compliance requirements change, so too do the solutions available to help assist businesses with meeting their obligations. Software such as Commissionly’s commission calculation tool offers an opportunity to navigate challenges with greater ease, today and in the future, however the demands around compliance evolve.
Looking to make life easier for your sales compensation team? Book a demo today.