6.2 Fixed Consideration

For example, assume that an entity enters into a contract with a customer to sell 10 widgets every month for 24 months at a price of $100 per widget. Both P ($100 per widget) and Q (10 widgets per month for 24 months) are known and do not vary during the term of the contract. Accordingly, the total transaction price is quantitatively fixed and known and can be calculated as $100 × (10 × 24) = $24,000.

Under the revenue standard, nonrefundable up-front fees are included in the transaction price in step 3 as if they were any other type of fixed consideration. That is, if consideration is fixed, it is included in the transaction price regardless of when it is paid (ignoring any potential significant financing component, which is discussed in Section 6.4). For example, nonrefundable up-front fees received in exchange for the future delivery of a good or service may reflect fixed consideration in a contract with a customer. The consideration may be allocated in step 4 across performance obligations, but at the contract level, the fee received by the entity up front is fixed consideration.

As discussed in Section 6.3, the boards established variable consideration as a very broad concept in the revenue standard. More specifically, the concept includes any variability in the ultimate amount of consideration to which the entity will be entitled. As a result, there are many arrangements that will include variable consideration. While there may be guaranteed minimums in arrangements, or up-front nonrefundable fixed amounts received in advance of work that may contribute to a fixed portion of consideration in an arrangement, those circumstances are often coupled with forms of variable consideration. Unless the amount to which an entity will be entitled will not vary in the future for any reason, the total consideration in the arrangement is not fixed.

For example, an arrangement would include variable consideration if the contract (implicitly or explicitly) allows for the customer to return the product (e.g., a right of return), past practice indicates that the seller will accept a lower amount of consideration as a price concession or discount, or there are any other adjustments to the ultimate amount to which an entity will be entitled in exchange for its goods or services. Further, an arrangement may include a fixed amount as a bonus payment if certain conditions are met. Although that amount may be quantitatively fixed, it nonetheless is not considered fixed consideration because the ultimate resolution of whether the entity will be entitled to that amount is subject to the occurrence or nonoccurrence of the event outlined in the contract. Accordingly, while known or quantitatively fixed amounts of consideration may sometimes be easier to identify and may even require less challenging estimation techniques, they will not be considered fixed consideration under the revenue standard if they can vary in the future for any reason.

Therefore, many arrangements will include some or many different forms of variable consideration.