Topic 606 does not explicitly state whether the requirement to determine if an amount payable to a customer relates to a distinct good or service acquired at an amount that does not exceed fair value applies to all payments to a customer. Topic 606 also does not state that some payments are excluded from the assessment. Stakeholders have identified different interpretations on the scope of the consideration payable to a customer guidance:

Some stakeholders think that entities must apply the guidance on consideration payable broadly to all customer payments. Supporters of this interpretation believe the intent of the guidance is similar to existing GAAP; therefore, the accounting results should be similar.

Supporters of Interpretation A note paragraphs BC256 and BC257 of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), that discuss the basis for the assessment that an entity performs to determine if the consideration is a discount or refund for goods or services provided to a customer or a payment for goods and services received from the customer.

Stakeholders that support Interpretation A note that the Board acknowledged that consideration received from a customer and consideration paid to a customer could be linked even if they are separate events. The only way to determine if consideration paid to the customer is linked to a revenue contract with a customer is to assess whether the consideration paid to the customer was for distinct goods or services acquired at an amount that does not exceed fair value. Said another way, because any payment to a customer “could be linked,” an entity would need to assess whether each payment relates to a distinct good or service acquired at an amount that does not exceed fair value.

Supporters acknowledge that Topic 606 does not explicitly state which payments should be considered. However, those stakeholders point out that Topic 606 also does not explicitly state that some payments to a customer should be considered while others are not considered in context of the consideration payable to a customer guidance. Those stakeholders reason that the lack of explicit guidance is consistent with the basis for conclusions of Update 2014-09 that all consideration payable to a customer should be assessed. They also think that conclusion is consistent with existing GAAP, which seems reasonable because the concepts related to consideration payable to a customer in Topic 606 are similar to existing GAAP.

Supporters of Interpretation B think the guidance on consideration payable to a customer is only applicable to amounts paid within the same contract or contracts that must be combined pursuant to paragraph 606-10-25-9. That view is consistent with paragraph 606-10-10-4 which states that Topic 606 “specifies the accounting for an individual contract with a customer.” These supporters also note that when consideration payable to a customer is not for distinct goods and services acquired at an amount that does not exceed fair value, the standard requires an entity to reduce the “transaction price” for the amount in excess of fair value. The transaction price notion is about the total consideration at the contract level and, therefore, the consideration payable to a customer needs to be within a contract (or combined contracts) with a customer.

Supporters of Interpretation B acknowledge that a payment to a customer could be related to a contract with a customer but might not always be identified through the contract combination guidance because the two contracts may not be “entered into at or near the same time.” However, supporters of Interpretation B assert that if an entity considers the contract modification guidance in context to the overall objective of Topic 606, it should identify consideration payable to a customer that relates to a revenue contract. With a focus on the overall objective of the revenue standard, those stakeholders think an entity would not only assess if the contract with the customer was legally modified, but also assess whether the contract has been economically modified.

To illustrate, assume that a truck manufacturer sells to a dealer 100 trucks. After delivery of the trucks, the dealer has difficulty selling the trucks to end customers. Six months after the delivery of the trucks to the dealer, the truck manufacturer communicates externally that it will provide $5,000 to each customer that purchases a truck from the dealer within 30 days. The contract for the sale of the 100 trucks and the contract for the rebate to the end customer might not be combined because the contracts were not entered into at or near the same time. The entity could conclude that the rebate to the end customer is not a contract modification, because the rebate does not change the scope or price of the contact with the dealer that is approved by both parties in accordance with paragraph 606-10-25-10. However, those stakeholders think economically the rebate is a modification of the sales price of the contract with the dealer. The manufacturer would be indifferent if the $5,000 is provided to the dealer or the end customer as long as the incentive generates more truck sales. The mechanics of whether the $5,000 goes to the dealer or to the end customer does not change the economics that led the manufacturer to offer the incentive.

Supporters of Interpretation B also think that, with Interpretation A, an entity might not meet the “core principle” of the revenue standard in paragraph 606-10-10-2 that “an entity shall recognize revenue to depict the transfer of promised goods or services to customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.” They assert that, with Interpretation A, an entity could be required to recognize a payment to a supplier (that is also a customer) as a reduction of revenue because of an unrelated transaction in a different line of business with that same supplier. This could occur because the entity is unable to demonstrate that the payment represents the fair value of the distinct goods or services it receives from the vendor. In that circumstance, those stakeholders assert that an entity’s revenue does not faithfully represent the consideration to which the entity expects to be entitled for providing goods and services.

TRG members agreed that a reasonable application of either View A or View B should result in similar financial reporting outcomes and that reasonable application of either view could be accomplished with processes and internal controls to identify payments to customers that could be related to a revenue contract.