Appendix C — Summary of Issues Addressed in the FASB Staff’s Revenue Recognition Implementation Q&As and/or by the TRG

C.10 Material Rights (Chapter 11 of the Roadmap)

C.10.1 Relevant Factors to Evaluate in Assessing Customer Options for Material Rights — Implementation Q&As 12 and 13 (Compiled From TRG Agenda Papers 6 and 11)

In determining whether an option for future goods or services is a material right, an entity should (1) consider factors outside the current transaction (e.g., the current class of customer30) and (2) assess both quantitative and qualitative factors. An entity should also evaluate incentives and programs to understand whether they are customer options designed to influence customer behavior (i.e., an entity should consider incentives and programs from the customer’s perspective) because this could be an indicator that an option is a material right.

For example, regarding certain offers, such as buy three and get one free, an entity would consider the fact that its customer has “earned” one-third of a free product, as well as whether the customer is likely to purchase the additional two products that would entitle it to the free product. Such an indicator may lead an entity to conclude that a customer option is a material right.

Similarly, an entity would consider loyalty programs that have an accumulation feature. Through the presence of an accumulation feature in a loyalty program, the entity may give its customers a material right. In its evaluation, the entity should consider that an element of the right granted to the customer in the current transaction is the customer’s ability to accumulate loyalty points that will entitle the customer to a free product.

C.10.2 Considering the Class of Customer in the Evaluation of Whether a Customer Option Gives Rise to a Material Right — Implementation Q&A 14 (Compiled From TRG Agenda Papers 54 and 55)

Stakeholder views have differed regarding how the class of customer should be considered in an entity’s evaluation of whether a customer option gives rise to a material right.

TRG members debated the application of concepts in the framework the staff used to analyze the examples in TRG Agenda Paper 54 but did not reach general agreement on (1) how or when to consider past transactions in determining the class of customer and (2) how the class of customer should be evaluated in the determination of the stand-alone selling price of an optional good or service.

A few TRG members maintained that discounts or status achieved through past transactions is akin to accumulating features in loyalty programs (and that such features therefore represent material rights). However, others indicated that these programs represent marketing inducements (i.e., discounts) for future transactions that should be evaluated in relation to those offered to other similar customers or potential customers (e.g., other high-volume customers or potential high-volume customers). The TRG members who viewed the programs as marketing inducements believed that considering a customer’s past transactions, among other factors, is appropriate in the evaluation of whether a good or service being offered to the customer reflects the stand-alone selling price for that class of customer in accordance with ASC 606-10-55-42 (particularly for entities that have limited alternative sources of information available upon which to establish a customer’s class). Further, these TRG members focused on the facts that (1) similar discounts on future transactions (like those provided in the form of benefits and other offers in status programs for no additional fees) may be given to other customers who did not make or have the same level of prior purchases with the entity and (2) such discounts may be provided at the stand-alone selling price for that class of customer (i.e., the good or service is not priced at a discount that is incremental to the range of discounts typically offered to that class of customer and therefore does not represent a material right).

Because general agreement was not reached, certain Board members recommended that the staff perform additional outreach, particularly with preparers in the travel and entertainment industries and with procurement personnel in large organizations, to understand how discounts and tier status programs are negotiated and structured.

Implementation Q&A 14 includes three examples that illustrate the FASB staff’s view on how the class of customer is considered in the evaluation of whether a customer option gives rise to a material right. The examples outline the view that an option offered to a customer should be compared with offers made to similar customers (e.g., similar high-volume customers) at prices independent of a prior contract (i.e., offers made to customers who do not have a prior contractual relationship with the entity). Significant judgment will be required to determine whether customers are comparable.

C.10.3 Distinguishing Optional Purchases From Variable Consideration — Implementation Q&A 23 (Compiled From TRG Agenda Papers 48 and 49)

Implementation Q&A 23 outlines a framework under which an entity would perform an evaluation of the nature of its promises in a contract with a customer. Such evaluation would include a careful assessment of the enforceable rights and obligations in the present contract (not future contracts). That is, there is a distinction between (1) customer options and (2) uncertainty that is accounted for as variable consideration. Customer options are predicated on a separate customer action (namely, the customer’s decision to exercise the option), which would not be embodied in the present contract; unless an option is a material right, such options would not factor into the accounting for the present contract. Uncertainty is accounted for as variable consideration when the entity has enforceable rights and obligations under a present contract to provide goods or services without an additional customer decision.

C.10.4 When Optional Goods and Services Would Be Considered Separate Performance Obligations — Implementation Q&A 21 (Compiled From TRG Agenda Papers 48 and 49)

Enforceable rights and obligations in a contract are only those for which the entity has legal rights and obligations under the contract and would not take economic or other penalties into account (e.g., (1) economic compulsion or (2) exclusivity because the entity is the sole provider of the goods or services, which may make the future deliverables highly probable of occurring). Accordingly, optional goods and services would be accounted for in the current contract if they represent material rights or are considered variable consideration because the entity has legal rights and obligations under the contract.

C.10.5 How to Evaluate a Material Right for the Existence of a Significant Financing Component — Implementation Q&A 35 (Compiled From TRG Agenda Papers 18, 25, 32, and 34)

While the determination of whether there is a significant financing component associated with a material right depends on the facts and circumstances, entities would need to evaluate material rights for the existence of significant financing components in a manner similar to how they would evaluate any other performance obligation. In accordance with ASC 606-10-32-17(a), if the timing of when the customer will exercise an option that provides it with a material right is at the customer’s discretion, no significant financing component would exist. In addition, under the practical expedient in ASC 606-10-32-18, an entity would not adjust the transaction price for a significant financing component if the entity expects, at contract inception, that the promised good or service will be delivered within one year of customer payment.

C.10.6 Accounting for a Customer’s Exercise of a Material Right — Implementation Q&A 15 (Compiled From TRG Agenda Papers 18, 25, 32, and 34)

In Implementation Q&A 15, the FASB staff states that the guidance in ASC 606 can reasonably be interpreted to allow an entity to account for a customer’s exercise of a material right in either of the following ways:

As a change in the contract’s transaction price31 (i.e., a continuation of the contract, whereby the additional consideration would be allocated to the performance obligation associated with the material right).
As a contract modification32(which may require reallocation of consideration between remaining performance obligations from the original contract and the performance obligation associated with the exercised material right).

The FASB staff adds that the entity’s chosen approach “should be applied consistently . . . to similar types of material rights with similar facts and circumstances.”

Although Implementation Q&A 15 does not discuss TRG members’ views, TRG Agenda Paper 34 notes that TRG members generally preferred that entities account for the exercise of a material right as a change in the contract’s transaction price but believed that it would be acceptable for an entity to account for the exercise of a material right as a contract modification.

Footnotes

ASC 606-10-25-2 and ASC 606-10-55-42.

ASC 606-10-32-42 through 32-45.

ASC 606-10-25-10 through 25-13.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.