Deloitte
Accounting Research Tool
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Chapter 11 — Customer Options for Additional Goods or Services (Material Rights)

11.7 Customer’s Exercise of a Material Right

11.7 Customer’s Exercise of a Material Right

When a contract with a customer includes a material right in the form of an option to acquire additional goods or services, an entity may account for the customer’s subsequent exercise of the material right either as if it were a separate contract (“Alternative A,” which we generally believe is preferable) or as if it were the modification of an existing contract (“Alternative B,” which we believe is acceptable). Those alternatives may be summarized as follows:
  • Alternative A (preferred) — At the time a customer exercises a material right, an entity treats the exercise as a continuation of the original contract such that the additional consideration is allocated only to the additional performance obligation underlying the material right. In effect, therefore, the entity is treating the exercise as if it were a separate contract altogether. Under this alternative, an entity should determine the transaction price of the “new” contract and include any additional consideration to which the entity expects to be entitled as a result of the exercise. This additional consideration, along with the consideration from the original contract that was allocated to the material right, should be allocated to the performance obligation underlying the material right and recognized as revenue when or as this performance obligation is satisfied. That is, the amount allocated to the material right as part of the original contract is added to any additional amounts due (under the “new” contract) as a consequence of the customer’s exercise of the material right, and that total is allocated to the additional goods or services under the “new” contract. The amounts previously allocated to the other goods and services in the original contract are not revised.
  • Alternative B (acceptable) — It is also acceptable to account for the exercise of a material right as a contract modification since it results in a change in the scope and the price of the original contract. An entity should apply the modification guidance in ASC 606-10-25-10 through 25-13.
    Since we believe that the application of Alternative B may be complex, we recommend that entities consider consulting with their accounting advisers before electing to use this method.

Footnotes

4
ASC 606-10-32-42 through 32-45 (paragraphs 87 through 90 of IFRS 15).
5
ASC 606-10-25-10 through 25-13 (paragraphs 18 through 21 of IFRS 15).