4.7 Combining Contracts
Generally, the revenue standard is applied at the individual contract level
unless the portfolio approach has been elected (see Section 3.1.2.2). However, an entity’s contracting
practice could result in a single arrangement with a customer that is governed by
multiple legal contracts. That is, the commercial substance of a single arrangement
to provide goods or services to a customer could be addressed by multiple contracts
with the same customer. The revenue standard requires multiple contracts with a
customer to be combined and accounted for as a single contract when certain
conditions are present.
ASC 606-10
25-9 An entity shall combine two or more contracts entered into at or near the same time with the same
customer (or related parties of the customer) and account for the contracts as a single contract if one or more
of the following criteria are met:
- The contracts are negotiated as a package with a single commercial objective.
- The amount of consideration to be paid in one contract depends on the price or performance of the other contract.
- The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation in accordance with paragraphs 606-10-25-14 through 25-22.
The contract combination guidance should be assessed at contract inception. An
entity will need to use judgment in determining whether multiple contracts are
“entered into at or near the same time.” As a general rule, the longer the period
between entering contracts with the same customer, the more likely those contracts
are not economically linked.