Chapter 6 — Step 3: Determine the Transaction Price

6.5 Noncash Consideration

ASC 606-10

32-21 To determine the transaction price for contracts in which a customer promises consideration in a form other than cash, an entity shall measure the estimated fair value of the noncash consideration at contract inception (that is, the date at which the criteria in paragraph 606-10-25-1 are met).

32-22 If an entity cannot reasonably estimate the fair value of the noncash consideration, the entity shall measure the consideration indirectly by reference to the standalone selling price of the goods or services promised to the customer (or class of customer) in exchange for the consideration.

32-23 The fair value of the noncash consideration may vary after contract inception because of the form of the consideration (for example, a change in the price of a share to which an entity is entitled to receive from a customer). Changes in the fair value of noncash consideration after contract inception that are due to the form of the consideration are not included in the transaction price. If the fair value of the noncash consideration promised by a customer varies for reasons other than the form of the consideration (for example, the exercise price of a share option changes because of the entity’s performance), an entity shall apply the guidance on variable consideration in paragraphs 606-10-32-5 through 32-14. If the fair value of the noncash consideration varies because of the form of the consideration and for reasons other than the form of the consideration, an entity shall apply the guidance in paragraphs 606-10-32-5 through 32-14 on variable consideration only to the variability resulting from reasons other than the form of the consideration.

32-24 If a customer contributes goods or services (for example, materials, equipment, or labor) to facilitate an entity’s fulfillment of the contract, the entity shall assess whether it obtains control of those contributed goods or services. If so, the entity shall account for the contributed goods or services as noncash consideration received from the customer.

When providing goods or services, an entity may receive noncash consideration from its customers (e.g., goods, services, shares of stock). Step 3 requires entities to include the fair value of the noncash consideration in the transaction price. Paragraph BC248 of ASU 2014-09 states the FASB’s and IASB’s rationale for this requirement: “When an entity receives cash from a customer in exchange for a good or service, the transaction price and, therefore, the amount of revenue should be the amount of cash received (that is, the value of the inbound asset). To be consistent with that approach, the Boards decided that an entity should measure noncash consideration at fair value.” Further, in issuing ASU 2014-09 and IFRS 15, the boards included guidance stating that changes in the fair value of noncash consideration for reasons other than its form would be subject to the variable consideration constraint in ASC 606-10-32-11 through 32-13 (paragraphs 56 through 58 of IFRS 15).

During the FASB’s outreach on issues related to the implementation of ASU 2014-09, stakeholders indicated that they were unclear about the measurement date in the determination of the fair value of noncash consideration received in a contract with a customer. Further, they questioned the applicability of the variable consideration constraint when changes in the fair value of the noncash consideration are due both to (1) its form (e.g., stock price changes attributable to market conditions) and (2) reasons other than its form (e.g., additional shares of stock that may become due on the basis of a contingent event).

In response, the FASB issued ASU 2016-12, which defines the measurement date for noncash consideration as the “contract inception” date and clarifies that this is the date on which the criteria in step 1 are met (i.e., the criteria in ASC 606-10-25-1, as discussed in Chapter 4).4 In addition, the transaction price does not include any changes in the fair value of the noncash consideration after the contract inception date that are due to its form. Further, ASU 2016-12 states that if changes in noncash consideration are due both to its form and to reasons other than its form, only variability resulting from changes in fair value that are due to reasons other than the consideration’s form is included in the transaction price as variable consideration (and thus also subject to the variable consideration constraint).

Lastly, some stakeholders asked the FASB to clarify how the fair value of noncash consideration should be measured on the contract inception date. As noted in paragraph BC39 of ASU 2016-12, the FASB elected not to clarify the measurement process because it believes that “the concept of fair value exists in other parts of [ASC] 606,” and an entity will need to use judgment in determining fair value.

ASC 606-10-32-21 requires an entity to measure the fair value of noncash consideration at contract inception. In terms of the sequence of steps used to determine the fair value of noncash consideration, ASC 606-10-32-21 and 32-22 require an entity to first look to measure the estimated fair value of the noncash consideration and then consider the stand-alone selling price of the goods or services promised to the customer only when the entity is unable to reasonably estimate the fair value of the noncash consideration.

The Codification examples below and Example 6-15 illustrate the application of the revenue standard’s guidance on noncash consideration in different contractual scenarios.

ASC 606-10

Example 31 — Entitlement to Noncash Consideration

55-248 An entity enters into a contract with a customer to provide a weekly service for one year. The contract is signed on January 1, 20X1, and work begins immediately. The entity concludes that the service is a single performance obligation in accordance with paragraph 606-10-25-14(b). This is because the entity is providing a series of distinct services that are substantially the same and have the same pattern of transfer (the services transfer to the customer over time and use the same method to measure progress — that is, a time-based measure of progress).

55-249 In exchange for the service, the customer promises 100 shares of its common stock per week of service (a total of 5,200 shares for the contract). The terms in the contract require that the shares must be paid upon the successful completion of each week of service.

55-250 To determine the transaction price (and the amount of revenue to be recognized), the entity measures the estimated fair value of 5,200 shares at contract inception (that is, on January 1, 20X1). The entity measures its progress toward complete satisfaction of the performance obligation and recognizes revenue as each week of service is complete. The entity does not reflect any changes in the fair value of the 5,200 shares after contract inception in the transaction price. However, the entity assesses any related contract asset or receivable for impairment. Upon receipt of the noncash consideration, the entity would apply the guidance related to the form of the noncash consideration to determine whether and how any changes in fair value that occurred after contract inception should be recognized.

Pending Content (Transition Guidance: ASC 606-10-65-3)

Example 31A — Share-Based Noncash Consideration

55-250A Example 31A illustrates the guidance in paragraph 606-10-15-3A on share-based noncash consideration from a customer for the transfer of goods or services and the guidance in paragraphs 606-10-32-21 through 32-24 on noncash consideration. In addition, the following guidance is illustrated in this Example:

Paragraph 606-10-25-14 on identifying performance obligations
Paragraph 606-10-32-4 on determining transaction price
Paragraphs 606-10-32-5 through 32-14 on variable consideration
Paragraphs 606-10-32-28 through 32-41 on allocating transaction price to the performance obligations in the contract
Paragraph 606-10-45-4 on an unconditional right to consideration.

55-250B On January 1, 20X7, an entity enters into a contract with a customer to sell 5,000 units of Product A. The customer will pay $100 for each unit upon delivery. If the entity delivers all 5,000 units within 2 years from contract inception, the customer promises a performance bonus of 100 warrants for the customer’s common stock. The estimated fair value of the 100 warrants at contract inception is $100,000. At contract inception, the entity concludes that each unit is a performance obligation that is satisfied at a point in time. Based on its experience, the entity expects that all 5,000 units will be delivered to the customer before the end of 20X8. Accordingly, it concludes that the variable consideration related to the 100 warrants is not constrained and the transaction price is $600,000 ([5,000 units × $100] + $100,000 estimated fair value of 100 warrants at contract inception). Accordingly, the transaction price allocated to each unit is $120 ($600,000/5,000 units).

55-250C During 20X7, the entity delivers 3,000 units to the customer. At the end of 20X7, the entity continues to expect that the remaining 2,000 units will be delivered to the customer before the end of 20X8. Therefore, the transaction price determined at contract inception is unchanged. For 20X7, the entity recognizes revenue of $360,000 (3,000 units × $120), cash of $300,000, and a contract asset of $60,000 ($100,000 estimated fair value of 100 warrants at contract inception × [3,000 delivered units/5,000 units]). The entity does not reflect any changes in the fair value of the 100 warrants in the transaction price. However, the entity assesses the related contract asset for impairment.

55-250D During 20X8, the entity delivers the remaining 2,000 units to the customer. For 20X8, the entity recognizes revenue of $240,000 (2,000 units × $120), cash of $200,000, and a contract asset of $40,000 ($100,000 estimated fair value of 100 warrants at contract inception × [2,000 delivered units/5,000 units]). The entity does not reflect any changes in the fair value of the 100 warrants in the transaction price. However, the entity assesses the related contract asset for impairment. When all 5,000 units have been delivered, the entity concludes that its right to receive or retain the 100 warrants is unconditional under this Topic. At that point, the entity derecognizes the contract asset and applies the guidance in other Topics to account for the 100 warrants.

Example 6-15

As part of Entity X’s revenue contract with Customer Y for the delivery of goods, X is entitled to receive 500 shares of Y’s common stock when all of the goods are provided to Y. In addition, if X delivers all goods within 90 days, it will receive an additional 100 shares of Y’s common stock. The changes in the fair value of the noncash consideration may vary between the contract inception date and the delivery of goods as a result of (1) the form of the common stock (i.e., because of changes in the market value) and (2) reasons other than its form (i.e., the quantity of shares that X will receive may vary if delivery occurs in 90 days).

ASU 2016-12 clarifies that the transaction price would include as variable consideration (subject to the variable consideration constraint) only changes in fair value that are due to reasons other than the consideration’s form (in this example, the quantity of shares to be received by the entity). Consequently, in this example, increases or decreases in the market value of the common stock would not be recorded as adjustments to the transaction price (i.e., revenue).

For illustrative purposes, assume the following:

At contract inception, the fair value of the 500 shares of Y’s common stock is $10 per share.
Entity X determines that the probability of delivering all goods within 90 days is 15 percent and that the most likely amount method better predicts the amount of variable consideration to which it will be entitled.

Entity X determines at contract inception that the transaction price is $5,000 (500 shares × $10 per share) and recognizes revenue as the goods are provided.

After 60 days, X determines that there is a 90 percent probability that all goods will be delivered within the remaining 30 days of the contract. After 60 days, the fair value of Y’s common stock is $12 per share. On the basis of the fair value of Y’s common stock at contract inception, X now determines that the transaction price is $6,000 (600 shares × $10 per share). The change in the transaction price is due to a change in the estimate of variable consideration under the most likely amount method. That is, the variability in the transaction price results from “reasons other than the form of the consideration.”5 The change in the transaction price ignores any change in the fair value of Y’s common stock (the form of the consideration) since contract inception. Accordingly, in this example, the $2 increase in the fair value of the common stock would be accounted for under other applicable GAAP.

Connecting the Dots

Example 6-15 illustrates variability in noncash consideration that is due to both (1) its form (i.e., changes in the market price of the common stock) and (2) drivers other than its form (i.e., the occurrence or nonoccurrence of an event). This example makes it easier to see how the measurement guidance in ASU 2016-12 would come into play after contract inception. In short, variability in item (2) would be subsequently reassessed and remeasured, but variability in item (1) would not be. In paragraph BC39 of ASU 2016-12, the FASB acknowledges that for item (1), the entity would thus be required to assess whether there is an embedded derivative that should also be bifurcated and measured at fair value in accordance with ASC 815-15. The FASB reasons in paragraph BC39 that contracts with noncash consideration are most commonly for payment in the form of shares of a nonpublic entity. Such shares would most likely not meet all of the criteria in ASC 815-15 to be bifurcated as an embedded derivative because they are not readily convertible to cash.

6.5.1 Noncash Consideration in the Form of Internet Advertisement Space in the Advertisement Technology Industry

Noncash consideration may sometimes be used in the advertisement technology industry — specifically, an entity may be paid in the form of Internet advertising space (commonly referred to as “impressions”). In addition, the total number of impressions received by the entity may vary depending on the number of impressions generated by the customer. In such situations, the noncash consideration would also represent a form of variable consideration.

Unlike some other forms of noncash consideration, impressions generated in the advertisement technology industry do not represent assets that are transferred to the entity at contract inception. Rather, the impressions will be generated in the future and therefore will become assets of the entity when the impressions are generated and control of the impressions is transferred to the entity. Consequently, the entity does not have control of the impressions at contract inception.

The entity should not recognize the contract-inception fair value of the impressions promised by the customer until control of the impressions is transferred to the entity. This determination is consistent with the guidance in ASC 606-10-32-24, which requires an entity to account for contributed goods or services as noncash consideration if the entity obtains control of those contributed goods or services. Although ASC 606-10-32-24 focuses on the evaluation of whether an entity should account for goods or services contributed by a customer as noncash consideration received from the customer, it also helps an entity understand when noncash consideration should be recognized. That is, the guidance in ASC 606-10-32-24 indicates that noncash consideration should be recognized only when control of the consideration is transferred to the entity.

Example 6-16

Company A enters into an arrangement with Company B in which A will provide a service to B ratably over a four-month period in exchange for cash of $1 million (payable in equal increments of $250,000 at the beginning of each month) and Internet advertising space (i.e., “impressions”) on B’s Web platform. In the arrangement, B does not promise a specified number or amount of impressions but promises a specified percentage of impressions generated on B’s Web platform; therefore, the number of users who will view A’s advertisement on B’s Web platform is unknown.

Company A should treat the impressions as variable consideration and estimate the fair value of the impressions expected to be generated and transferred by B at contract inception. In this case, A estimates that it will receive 20 million impressions at a fair value of $10 cost per mille (CPM) — that is, $10 cost per 1,000 impressions — for a total fair value of $200,000. However, because control of the impressions has not been transferred to A at contract inception, A would not record an asset for the estimated fair value of the impressions to be received.

At the end of the first month of the service contract, B has generated 8 million impressions and transferred them to A. On the basis of the fair value of $10 CPM estimated at contract inception, A has received from B noncash consideration totaling $80,000, or 8 million impressions × ($10 ÷ 1,000 impressions). However, since A has performed only 25 percent of its promised service to B (one month’s service to date under the four-month service contract), only $300,000 of revenue has been earned ($1.2 million × 25%). Therefore, A should record revenue of $300,000 and a contract liability of $30,000 for the impressions received that have not yet been earned, which is calculated as $330,000 consideration received ($250,000 cash and $80,000 noncash) less $300,000 recognized as revenue. If, instead, A received 3 million impressions for noncash consideration of $30,000, or 3 million impressions × ($10 ÷ 1,000 impressions), A should record a contract asset of $20,000, or $280,000 consideration received ($250,000 cash and $30,000 noncash) compared with $300,000 recognized as revenue.

Note that this example represents a simple fact pattern and does not contemplate changes or updates to the number of impressions that A would be granted under the arrangement.

6.5.2 Accounting for Barter Credits

The example below illustrates how an entity would account for radio and television advertising barter credits.

Example 6-17

Company C, a retailer, enters into a transaction in which it transfers consumer product inventory to a barter company in exchange for radio and television advertising airtime barter credits. The radio and television advertising airtime is provided to the barter company by Company A, a broadcasting company. The airtime is available at certain times in certain markets for the next 24 months through a media outlet.

In the manner described in Section 3.2.5, C should first consider whether the barter credit transaction is subject to the scope exception for nonmonetary exchanges in ASC 606-10-15-2(e).

In accordance with ASC 606-10-15-2(e), nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers are outside the scope of ASC 606 and may be subject to the guidance in ASC 845 on nonmonetary transactions. Typically, no revenue is recognized when the guidance in ASC 845 is applied to such nonmonetary exchanges outside the scope of ASC 606.

As described above, C is a retailer and is not in the same line of business as the barter company or A, a broadcasting company. Therefore, the barter credit transaction is not subject to the scope exception in ASC 606-10-15-2(e). That is, the barter credit transaction is not a nonmonetary exchange that facilitates a sale to another party. Accordingly, C should consider whether the nonmonetary exchange represents a contract with a customer.6 Company C’s conclusion will depend on the facts and circumstances of the specific arrangement, including the terms of the parties’ contract.

If C concludes that the nonmonetary exchange represents a contract with a customer, C should account for the consideration (i.e., radio and television advertising airtime barter credits) it receives from the customer in exchange for the goods (i.e., consumer product inventory) it provides to the customer as noncash consideration. Under ASC 606-10-32-21, an entity is required to measure the estimated fair value of noncash consideration at contract inception when determining the amount of noncash consideration to include in the transaction price. Therefore, C should determine at contract inception the estimated fair value of the radio and television advertising airtime barter credits it receives from the customer. Since C does not receive any other consideration in the barter credit transaction, the estimated fair value of the radio and television advertising airtime barter credits at contract inception represents the transaction price of C’s contract to provide the consumer product inventory to the customer. When the fair value of the noncash consideration cannot be reasonably estimated, the noncash consideration is measured indirectly by reference to the stand-alone selling price of the goods or services promised to the customer (or class of customer) in exchange for the noncash consideration.

Connecting the Dots

Arrangements between media producers and broadcasters often include a requirement that the broadcaster air certain advertising spots for the media producer during the broadcast of the media producer’s content. For example, assume that a media producer enters into an agreement to license one season of a syndicated television sitcom (10 episodes, each with 22 minutes of content) to a broadcast network in exchange for $5 million in cash. The arrangement stipulates that each time one of the sitcom episodes airs in a 30-minute time slot on the network, the media producer is allowed to sell, and have aired, advertising spots (i.e., commercials) for 4 of the 8 available minutes of airtime while the broadcast network will provide the advertising spots for the remaining 4 minutes.

Industry stakeholders have considered whether the agreement to allow the media producer to sell advertising spots that will air during the broadcast of the syndicated sitcom represents noncash consideration in exchange for licensing the syndicated sitcom to the broadcast network. This issue was ultimately brought to the attention of the FASB and SEC staffs by industry stakeholders and public accounting firms.

The FASB staff generally preferred a view that the future advertising spots provided by the broadcast network to the media producer are not a form of noncash consideration that the media entity receives in exchange for a license to the media content. The FASB staff indicated that it gave particular weight to an understanding that the value of the future advertising spots is inextricably linked to the value of the licensed content; the more valuable or popular the syndicated sitcom is, the more valuable the future advertising spots are. Accordingly, the FASB staff noted that in these particular unique circumstances, the arrangements could be viewed as either of the following:

Two arrangements: one for the license of IP (i.e., the syndicated sitcom) and another for the sale of future advertising spots.
A profit-sharing arrangement that includes fixed consideration and variable consideration in the form of a sales- or usage-based royalty.

The FASB staff noted that either approach would result in similar reporting outcomes. That is, revenue would be recognized (1) as fixed consideration upon the transfer of the license of IP and (2) as variable consideration as the media producer sells future advertising spots and such spots are aired.

The FASB staff also noted that it could not object to a view that the future advertising spots provided by the broadcast network to the media producer represent noncash consideration in accordance with ASC 606-10-32-21. However, the FASB staff noted the difficulties associated with applying the noncash consideration measurement guidance in ASC 606-10-32-21 through 32-24 to advertising space if such was concluded to be noncash consideration.

The SEC staff noted that preparers should provide sufficient detailed disclosures to enable financial statement users to understand the entity’s evaluation of the nature, substance, and economics of these arrangements.

As noted in Example 6-17, an entity is required to measure the fair value of noncash consideration at contract inception. However, if an entity cannot reasonably estimate the fair value of the noncash consideration to be received in the form of barter credits, it might be appropriate for the entity to measure the consideration indirectly by reference to the stand-alone selling price of the consumer product inventory promised to the customer in exchange for this noncash consideration.

Further, an entity should carefully consider the particular good or service being promised to the customer in exchange for the noncash consideration and whether its stand-alone selling price may in fact differ from its normal retail price. Sometimes, a good or service is exchanged in a barter transaction precisely because the entity has encountered difficulties in selling it at a normal retail price and through normal sales channels. For example, an entity may be willing to exchange excess inventory that it is unable to sell through normal retail channels for barter credits. In this case, it may not be appropriate to conclude that the retail price of the promised good is an appropriate measure of the fair value of the noncash consideration.

6.5.3 Noncash Settlement Denominated in Cash

Revenue contracts will sometimes dictate a transaction price that is denominated in cash but is settled in a form other than cash (e.g., a transaction price of USD 100 that will be paid in an equal value of a specified cryptocurrency). We do not believe that these contracts are subject to the guidance on noncash consideration in ASC 606-10-32-21 through 32-24. This is because we believe that the guidance in ASC 606-10-32-21 through 32-24 is meant to address situations in which a contract value is denominated (rather than merely settled) in an amount of noncash consideration. For example, whereas a contract price that is denominated in five units of a specified cryptocurrency would be subject to the guidance in ASC 606-10-32-21 through 32-24, a contract price that is denominated in USD but settled in a specified cryptocurrency would not be subject to that guidance.

Example 6-17A

Company V is a digital wallet service provider that allows users to store and exchange digital assets by using V’s platform to access storage and transaction services that are offered through interfaces provided by independent third-party application programming interface (API) providers.

On October 25, 20X3, V enters into a contract with API Provider A that specifies that V will integrate A’s interface with V’s platform and make the interface accessible to users. The contract further specifies that each time a user performs a transaction involving the user’s exchange of a digital asset by accessing A’s interface through V’s platform, A will pay V a transaction fee of 5 percent of the transaction’s value (i.e., 5 percent of the fair value of the digital asset exchanged by the user as of the time of the exchange). The transaction fee is denominated in USD. For example, if a user exchanges X amount of the cryptocurrency Solana for Y amount of the cryptocurrency ethereum, and X amount of Solana has a USD value of $Z on the exchange date, the transaction fee will be 5 percent of $Z. The contract requires A to pay the transaction fee to V in an amount of bitcoin (BTC) that is equal in value to the transaction fee as of the transaction date. The USD amount to be paid in BTC is calculated on the transaction date and is fixed as of that date.

Company V evaluates its contract with A and makes the following determinations:

The contract meets all of the criteria in ASC 606-10-25-1 upon being signed by A.
Company V has a single performance obligation: a promise to perform interface integration services (i.e., integrate A’s interface with V’s platform and make the interface accessible to users).
Company V’s performance obligation represents a series of distinct services that are substantially the same and have the same pattern of transfer to A over the contract period (in accordance with ASC 606-10-25-14(b)).
The transaction fee represents variable consideration that needs to be allocated in accordance with ASC 606-10-32-28.
Company V meets the variable consideration allocation conditions in ASC 606-10-32-40 to be able to allocate consideration received to a distinct service (i.e., a daily provision of interface integration services) within the series as noted in ASC 606-10-32-39(b).

Because the value of the transaction fee for each transaction is denominated in USD, V measures the transaction price on the basis of the USD value of the transaction fees. Consequently, V concludes that its contract with A is not subject to the guidance on noncash consideration in ASC 606-10-32-21 through 32-24 (whose application could result, for example, in (1) the measurement of BTC as of the contract inception date of October 25, 20X3, and (2) the exclusion from the transaction price of subsequent changes in BTC’s value that are due to its form).

Footnotes

ASU 2016-12 and the FASB’s updates to the guidance on noncash consideration reflect a difference between ASC 606 and IFRS 15. The IASB decided not to make the changes in ASU 2016-12 to IFRS 15. As a result, IFRS 15 does not require the measurement of noncash consideration as of the inception date. See Appendix A for a summary of differences between U.S. GAAP and IFRS Accounting Standards on revenue-related topics.

Quoted from ASU 2016-12.

A customer is defined in the ASC 606 glossary as a “party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.”

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.