7.7 Allocation Considerations for Significant Financing Components
Under step 3 of ASC 606’s revenue recognition model, an entity may
need to adjust its transaction price for the existence of a significant financing
component (see Section 6.4).
ASC 606-10-32-15 requires an entity to adjust the transaction price for the effects
of the time value of money if the timing of payments agreed to by the parties to the
contract provides the customer or the entity with a significant benefit of financing
the transfer of goods or services to the customer (see Section 6.3). In those circumstances, the contract contains a
significant financing component.
In situations involving a contract with a customer that includes multiple performance
obligations, questions have arisen about whether an adjustment to the transaction
price resulting from a significant financing arrangement could be allocated to one
or more, but not all, performance obligations.
Generally, a significant financing component in a contract is
related to the contract as a whole rather than to the individual performance
obligations in the contract. However, it may be reasonable in some circumstances to
allocate a significant financing component to one or more, but not all, of the
performance obligations in the contract. As a practical matter, when an entity
considers the basis for such allocation, it may be appropriate for the entity to
analogize to (1) the guidance in ASC 606-10-32-36 through 32-38 on allocating a
discount or (2) the guidance in ASC 606-10-32-39 through 32-41 on allocating
variable consideration.
An entity that is considering the possibility of allocating a
significant financing component to one or more, but not all, of the performance
obligations in a contract will need to use judgment in determining whether such an
approach is reasonable in the particular circumstances of that contract.
The above issue is addressed in Implementation Q&A 37 (compiled from previously issued
TRG Agenda Papers 30 and 34). For additional information and Deloitte’s summary of
issues discussed in the Implementation Q&As, see Appendix C.