C.6 Step 4 — Allocate the Transaction Price (Chapter 7 of the Roadmap)
C.6.1 Allocating Discounts and Variable Consideration — Implementation Q&A 38 (Compiled From TRG Agenda Papers 31 and 34)
Because discounts may be variable consideration, stakeholders have questioned which guidance should be applied when an entity’s contract with a customer includes a discount.
TRG members generally agreed with the FASB and IASB staffs that ASC 606-10-32-41
establishes a hierarchy that requires an entity to identify, and allocate
variable consideration to, performance obligations before applying other
guidance (e.g., the guidance on allocating a discount). Accordingly, an entity
would first determine whether a discount is variable consideration. If the
entity concludes that the discount is variable consideration, it would apply the
variable consideration allocation guidance if the related criteria are met.
Otherwise, the entity would look to the discount allocation guidance to
determine how to allocate the discount.
C.6.2 Allocating Variable Consideration to a Series of Distinct Services — Implementation Q&A 45 (Compiled From TRG Agenda Papers 39 and 44)
Stakeholders have questioned whether an entity is required to allocate variable
consideration on the basis of the relative stand-alone selling price of each
distinct good or service in a series accounted for as a single performance
obligation under ASC 606-10-25-14(b) (i.e., the series guidance).
As stated in ASC 606-10-32-29, the general allocation principle does not apply if the
criteria in ASC 606-10-32-39 through 32-41 are met. A relative stand-alone selling
price allocation is not required for an entity to assess whether the criteria in ASC
606-10-32-40 are met. Entities should use reasonable judgment to determine a
reasonable allocation. Implementation Q&A 45 includes illustrative examples,
which are summarized as follows:
- Example A — An entity provides services under a multiyear IT outsourcing arrangement with continuous delivery of various activities over the contract term. The price per unit declines over time, reflecting the expected decreasing level of effort required. In addition, price benchmarking will be performed at various points during the contract, and pricing will be updated prospectively if market prices are significantly below the contract prices. The allocation objective may be met because the pricing is based on market terms and the decreasing prices are associated with declining costs of fulfilling the obligation.
- Example B — An entity provides transaction processing over a multiyear term, with fees due that are based on a percentage of the dollar value processed in each transaction. The allocation objective may be met for each month of service if the fees are priced consistently throughout the contract and the rates are consistent with prices charged to other similar customers.
- Example C — An entity provides hotel management services during a multiyear term, with fees due that are based on (1) a percentage of monthly rental revenue, (2) reimbursement of labor costs, and (3) a percentage of gross operating profit. The fees based on monthly rental revenue in this example are similar to fees in the hotel management example in paragraph BC285 of ASU 2014-09, which are based on occupancy rates. Accordingly, those fees may meet the allocation objective for each month of service because they reflect the value transferred to the customer in each period. In addition, the reimbursement fees may meet the allocation objective if they are representative of the costs incurred to fulfill the contract each period. Further, the fees based on a percentage of gross operating profit may meet the allocation objective if they reflect the value transferred to the customer in each period.
- Example D — An entity provides a franchisee with the right to use its trade name and sell its products over a multiyear term. The entity will receive a sales-based royalty based on a fixed percentage of the franchisee’s sales. The allocation objective may be met because the fee earned each day is based on a consistent formula and percentage throughout the term and represents the value transferred to the customer each period.
C.6.3 How to Apply the Significant Financing Component Guidance to Contracts With Multiple Performance Obligations — Implementation Q&A 37 (Compiled From TRG Agenda Papers 30 and 34)
An entity will need to use judgment when attributing a
significant financing component to one or more performance obligations. It may
be more consistent with the overall allocation objective in ASC 606-10-32-28 to
attribute the effect of a significant financing component to one or more (but
not all) performance obligations in a contract by analogizing to the guidance on
allocating variable consideration or to the guidance on allocating a
discount.