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Chapter 6 — Step 3: Determine the Transaction Price

6.3 Variable Consideration

6.3 Variable Consideration

ASC 606-10
32-6 An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items. The promised consideration also can vary if an entity’s entitlement to the consideration is contingent on the occurrence or nonoccurrence of a future event. For example, an amount of consideration would be variable if either a product was sold with a right of return or a fixed amount is promised as a performance bonus on achievement of a specified milestone.
32-7 The variability relating to the consideration promised by a customer may be explicitly stated in the contract. In addition to the terms of the contract, the promised consideration is variable if either of the following circumstances exists:
  1. The customer has a valid expectation arising from an entity’s customary business practices, published policies, or specific statements that the entity will accept an amount of consideration that is less than the price stated in the contract. That is, it is expected that the entity will offer a price concession. Depending on the jurisdiction, industry, or customer this offer may be referred to as a discount, rebate, refund, or credit.
  2. Other facts and circumstances indicate that the entity’s intention, when entering into the contract with the customer, is to offer a price concession to the customer.

Footnotes

1
Variable consideration would not need to be estimated if an entity is applying (1) the invoice practical expedient to measure progress toward complete satisfaction of a performance obligation (see Section 8.5.8.1) or (2) the variable consideration allocation exception in ASC 606-10-32-40 (see Section 7.5).
2
ASC 606-10-10-4 states that an entity is permitted to use a portfolio approach as a practical expedient to account for a group of contracts with similar characteristics rather than account for each contract individually. However, an entity may only apply the practical expedient if it does not expect the results of applying the guidance in ASC 606 to a portfolio of contracts to be materially different from the results of applying that guidance to individual contracts.
3
An entity would allocate variable consideration and subsequent changes to it “entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation” if the criteria in ASC 606-10-32-40 are met.