11.4 Likelihood That an Option for Additional Goods or Services Will Be Exercised

Some business models include arrangements under which a vendor will sell an up-front good or service and also provide the customer with an option to purchase other distinct goods or services in the future that are related to the up-front good or service (e.g., a specialized piece of equipment and an option to buy specialized consumables that will be needed for its operation). Such arrangements may include features that result in a degree of economic compulsion such that there is a very high level of confidence that the customer will exercise its option.

In such circumstances, when it is highly probable, or even virtually certain, that the customer will exercise its option, the additional goods or services should not be treated as performance obligations under the contract. The treatment of customer options is explained in paragraph BC186 of ASU 2014-09, in which the FASB and IASB clarified that “the transaction price does not include estimates of consideration from the future exercise of options for additional goods or services,” making no reference to the probability that those options will be exercised.

Accordingly, irrespective of how likely it is that a customer will choose to purchase additional goods or services, the entity should not treat those goods or services as performance obligations under the initial contract. Instead, the entity should evaluate the customer option (in accordance with ASC 606-10-55-41 through 55-45) to determine whether it gives rise to a material right.

The above issue is addressed in Implementation Q&A 21 (compiled from previously issued TRG Agenda Papers 48 and 49). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.