11.5 Allocation of Consideration to Material Rights
ASC 606-10
55-44 Paragraph 606-10-32-29
requires an entity to allocate the transaction price to
performance obligations on a relative standalone selling
price basis. If the standalone selling price for a
customer’s option to acquire additional goods or services is
not directly observable, an entity should estimate it. That
estimate should reflect the discount that the customer would
obtain when exercising the option, adjusted for both of the
following:
-
Any discount that the customer could receive without exercising the option
-
The likelihood that the option will be exercised.
55-45 If a customer has a material
right to acquire future goods or services and those goods or
services are similar to the original goods or services in
the contract and are provided in accordance with the terms
of the original contract, then an entity may, as a practical
alternative to estimating the standalone selling price of
the option, allocate the transaction price to the optional
goods or services by reference to the goods or services
expected to be provided and the corresponding expected
consideration. Typically, those types of options are for
contract renewals.
If an entity’s contract with a customer includes a material right in
the form of an option to acquire additional goods or services, ASC 606-10-55-41
through 55-45 require the entity to allocate part of the transaction price to that
right and recognize the associated revenue when those future goods or services are
transferred or when the option expires. The allocation of consideration to all of
the performance obligations in a contract as required in step 4 is performed on the
basis of stand-alone selling prices. As explained in paragraph BC390 of ASU 2014-09,
option pricing models can be used to estimate an option’s stand-alone selling price.
In addition, ASC 606-10-55-45 provides an alternative to estimating the stand-alone
selling price of a customer option when certain criteria are met (discussed in
Section 11.9).
Allocation of the transaction price in step 4 is discussed comprehensively in
Chapter 7.