What Are the Main Provisions?
The core principle of the guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity should apply the
following steps:
Step 1: Identify the contract(s)
with a customer.
Step 2: Identify the performance
obligations in the contract.
Step 3: Determine the
transaction price.
Step 4: Allocate the transaction
price to the performance obligations in the contract.
Step 5: Recognize revenue when (or
as) the entity satisfies a performance obligation.
Yesterday we covered Steps 1 & 2. Today we will
cover Step 3:
Step
3: Determine the Transaction Price
The
transaction price is the amount of consideration (for example, payment)
to which an entity expects to be entitled in exchange for transferring promised
goods or services to a customer, excluding amounts collected on behalf of third
parties. To determine the transaction price, an entity should consider the
effects of:
1. Variable
consideration—If
the amount of consideration in a contract is variable, an entity should determine
the amount to include in the transaction price by estimating either the
expected value (that is, probability-weighted amount) or the most likely
amount, depending on which method the entity expects to better predict the
amount of consideration to which the entity will be entitled.
2. Constraining
estimates of variable consideration—An entity should include in the
transaction price some or all of an estimate of variable consideration only to
the extent it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur when the uncertainty associated
with the variable consideration is subsequently resolved.
3. The existence of a
significant financing component—An entity should adjust the promised
amount of consideration for the effects of the time value of money if
the timing of the payments agreed upon by the parties to the contract (either
explicitly or implicitly) provides the customer or the entity with a
significant benefit of financing for the transfer of goods or services to the
customer. In assessing whether a financing component exists and is
significant to a contract, an entity should consider various factors. As
a practical expedient, an entity need not assess whether a contract has a
significant financing component if the entity expects at contract inception
that the period between payment by the customer and the transfer of the
promised goods or services to the customer will be one year or less.
4. Noncash
consideration—If a customer promises consideration in a form other than
cash, an entity should measure the noncash consideration (or promise of noncash
consideration) at fair value. If an entity cannot reasonably estimate the
fair value of the noncash consideration, it should measure the consideration
indirectly by reference to the standalone selling price of the goods or
services promised in exchange for the consideration. If the noncash
consideration is variable, an entity should consider the guidance on
constraining estimates of variable consideration.
5. Consideration
payable to the customer—If an entity pays, or expects to pay,
consideration to a customer (or to other parties that purchase the entity’s
goods or services from the customer) in the form of cash or items (for example,
credit, a coupon, or a voucher) that the customer can apply against amounts
owed to the entity (or to other parties that purchase the entity’s goods or
services from the customer), the entity should account for the payment
(or expectation of payment) as a reduction of the transaction price or as a
payment for a distinct good or service (or both). If the consideration
payable to a customer is a variable amount and accounted for as a reduction in
the transaction price, an entity should consider the guidance on constraining
estimates of variable consideration.
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