11.1 In General
ASC 606-10
55-41 Customer options to acquire
additional goods or services for free or at a discount come
in many forms, including sales incentives, customer award
credits (or points), contract renewal options, or other
discounts on future goods or services.
55-42 If, in a contract, an entity
grants a customer the option to acquire additional goods or
services, that option gives rise to a performance obligation
in the contract only if the option provides a material right
to the customer that it would not receive without entering
into that contract (for example, a discount that is
incremental to the range of discounts typically given for
those goods or services to that class of customer in that
geographical area or market). If the option provides a
material right to the customer, the customer in effect pays
the entity in advance for future goods or services, and the
entity recognizes revenue when those future goods or
services are transferred or when the option expires.
55-43 If a customer has the option
to acquire an additional good or service at a price that
would reflect the standalone selling price for that good or
service, that option does not provide the customer with a
material right even if the option can be exercised only by
entering into a previous contract. In those cases, the
entity has made a marketing offer that it should account for
in accordance with the guidance in this Topic only when the
customer exercises the option to purchase the additional
goods or services.
An entity’s contract with a customer may give the customer a choice
of whether to purchase additional goods or services; such a choice is typically
referred to as an option for additional goods or services. Options for additional
goods or services may include, but are not limited to:
- Loyalty programs in which customers accumulate points that may be used to acquire future goods or services.
- Discount vouchers.
- Renewal options.
- Contracts that include (1) a customer’s payment of a nonrefundable up-front fee and (2) renewal options.
In some cases, such options are marketing or promotional efforts to
gain future contracts with customers. However, in other cases, such options are
purchased (often implicitly) in conjunction with a present customer contract.
Entities are required to identify options for additional goods or
services because in certain circumstances, such options can lead to performance
obligations. As explained in paragraph BC386 of ASU
2014-09, the FASB and IASB realized that it could be difficult
to differentiate between (1) an option for additional goods or services that was
paid for by the customer and (2) a marketing or promotional offer for which the
customer did not pay. The first type of option for additional goods or services
would be identified as a performance obligation to which consideration must be
allocated in accordance with step 4 (see Chapter 7) of the revenue standard.
To help entities determine whether an option for additional goods or
services is a performance obligation, the boards included the concept of a material
right in the revenue standard. If an entity determines that an option for additional
goods and services is a material right, the option should be considered a
performance obligation. However, an entity will need to use judgment to determine
whether a material right exists.
A material right in a contract is provided to a customer only if the customer would
not have received it without entering into that contract. The guidance in the
revenue standard describes an example of a material right as an option that provides
the customer an incremental discount beyond the discounts that are typically given
(considering the class of customer). Paragraph BC387 of ASU 2014-09 indicates that
the concept of a significant and incremental discount in ASC 985-605 under legacy
U.S. GAAP forms the basis for the principle of a material right in ASC 606.
Specifically, paragraph BC387 states, in part:
Previous U.S. GAAP revenue recognition guidance for the software industry
specified that an offer of a discount on future purchases of goods or
services was presumed to be a separate option in the contract, if that
discount was significant and also incremental both to the range of discounts
reflected in the pricing of other elements in that contract and to the range
of discounts typically given in comparable transactions. Those notions of
“significant” and “incremental” form the basis for the principle of a
material right that is used to differentiate between an option and a
marketing or promotional offer. However, the Boards observed that even if
the offered discount is not incremental to other discounts in the contract,
it nonetheless could, in some cases, give rise to a material right to the
customer.
Paragraph 12 of TRG Agenda Paper 6 comments on the discussion in paragraph
BC387 of ASU 2014-09 as follows:
In addition to the guidance provided in paragraphs
606-10-55-41 through 55-45 [B39–B43], paragraph BC387 clarifies that the
notions of “significant” and “incremental” form the basis for the principle
of a material right. The principle is, in part, derived from current[1] revenue recognition guidance in Generally Accepted Accounting
Principles (GAAP), which originally was developed for the software industry
but is applied broadly across all industries. That existing[2] guidance presumes that an offer of a discount on future purchases of
goods or services is a separate option in a contract if that discount is (a)
significant and (b) incremental to both the range of discounts reflected in
the pricing of other elements in the contract and the range of discounts
typically given in comparable transactions. However, the Boards acknowledged
that, unlike current[3] GAAP, under the new revenue standard even if (for example) a discount
is not incremental to the range of discounts reflected in the pricing of
other elements in the contract, it could give rise to a material
right to the customer.
Therefore, we believe that a discount represents a material right if
it is (1) significant and (2) incremental to discounts that would be given to a
potential customer (e.g., discounts that are routinely provided as a marketing
offer).