7.6 Changes in the Transaction Price

As discussed in Chapter 6, an entity needs to determine a contract’s transaction price so that it can be allocated to the performance obligations in the contract. This determination is made at contract inception. However, after contract inception, the transaction price could change for various reasons (e.g., changes in an estimate of variable consideration). Generally, any change in the transaction price should be allocated to the performance obligations on the same basis used at contract inception. For example, if the criteria for allocating variable consideration to one or more, but not all, performance obligations are met, changes in the amount of variable consideration to which the entity expects to be entitled would be allocated to such performance obligation(s) on the same basis. If the criteria for allocating variable consideration to one or more, but not all, performance obligations are not met, changes in the transaction price after contract inception would be allocated to all of the performance obligations in the contract on the basis of the initial relative stand-alone selling prices. An entity would not reallocate the transaction price for changes in stand-alone selling prices after contract inception.

For changes in the transaction price that arise as a result of a contract modification, an entity should apply the guidance on contract modifications in ASC 606-10-25-10 through 25-13 (see Section 9.4). However, if the transaction price changes after a contract modification, an entity would allocate the change as follows:

• The change in the transaction price is allocated to a performance obligation that was identified before the contract modification when (1) the change in the transaction price is attributable to variable consideration related to that performance obligation and (2) the contract modification is accounted for as if the contract was terminated and a new contract was entered into (see ASC 606-10-25-13(a)).
• In all other situations, the change in the transaction price is allocated to the unsatisfied or partially satisfied performance obligations that are identified after the contract modification.

An entity should consider whether the change in the price is due to (1) the resolution of variability that existed at contract inception or (2) a change in the scope or price (or both) of the contract that changes the parties’ rights and obligations after contract inception.

ASC 606-10-32-42 describes a change in the transaction price as the “resolution of uncertain events or other changes in circumstances that change the amount of consideration to which an entity expects to be entitled in exchange for the promised goods or services.” A change in the transaction price could result from the resolution of variable consideration (e.g., achieving a performance bonus or qualifying for a volume rebate) that was part of the contract at inception. However, the contract does not always have to specifically identify forms of variable consideration for subsequent changes to be accounted for as a change in the transaction price. The following factors could suggest that subsequent changes in the transaction price do not constitute a contract modification:

• The entity has a history of granting price concessions to customers, which may or may not have been specifically negotiated.
• The selling prices of the goods or services are highly variable, and the entity has a demonstrated history of not enforcing payment of the stated sales price (e.g., the entity has granted extended payment terms and has a history of not enforcing payment of the full contract price).
• Changes in the transaction price result from customer satisfaction issues related to the underlying product or service.

On the other hand, a contract modification is described in ASC 606-10-25-10 as “a change in the scope or price (or both) of a contract that is approved by the parties to the contract. . . . A contract modification exists when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract.” Although contract modifications will usually result from negotiations between the parties after contract inception, finalizing the amount of concessions or other variable consideration may also require subsequent negotiations between the parties. Therefore, the existence of negotiations is not in itself determinative of whether a change represents a change in the transaction price or a contract modification. Further, while contract modifications often include the addition or removal of goods or services, they could occasionally occur without a change in the scope of the contract (i.e., only as a result of a change in price). The following factors could suggest that a change in the transaction price should be accounted for as a modification:

• Subsequent changes in market conditions suggest that there has been a substantial change in the market price of the goods or services that was not anticipated at contract inception, which resulted in the entity’s agreeing to adjust the transaction price.
• The entity has no history of granting price concessions, and the price concession is not related to the quality of the transferred goods or services.
• The entity agreed to a reduction in the transaction price for remaining goods or services to induce its customer to enter into a contract for additional goods or services.
• Technological advances and competitive pressures that did not exist at contract inception result in a significant change in the price that the entity is willing to accept for its goods or services.

An entity will need to use judgment to determine whether a change in price is the result of a change in the transaction price or a contract modification, especially when the entity provides the customer with a price concession. In situations involving a price concession, an entity will need to consider whether the price concession should have been contemplated at contract inception and thus represents a change in the transaction price. As illustrated in Example 5, Case B, of the revenue standard (ASC 606-10-55-114 through 55-116), this may be the case when the concession is related to product defects or service issues associated with products or services that have already been transferred to the customer. Had the product defects or service issues been anticipated at contract inception, the potential price concession would have been identified as a source of variable consideration under the contract.

Alternatively, a concession may result from a change in market conditions that could not have been anticipated at contract inception. The resulting change in the price of the contract changes the existing enforceable rights and obligations of the parties under the contract and should be accounted for as a contract modification in accordance with ASC 606-10-25-10 through 25-13.

The example below illustrates the identification of and accounting for a change in the transaction price that results from a contract modification.

In contrast to the example above, the example below illustrates the identification of and accounting for a change in the transaction price that does not result from a contract modification.

Refer to Chapter 9 for additional information about accounting for contract modifications.