The guidance on consideration payable to a customer refers to payments made “to other parties that purchase the entity’s goods or services from the customer.” Paragraph BC255 of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), refers to payments an entity makes to “its customers or to its customer’s customer (for example, an entity may sell a product to a dealer or distributor and subsequently pay amounts to or provide a cash incentive to a customer of that dealer or distributor).” Questions have arisen as to whether the scope of the guidance applies only to payments to customers in the distribution chain or whether “customer’s customer” should be interpreted more broadly.

For example, an entity that is acting as an agent typically views the principal in the arrangement as its customer. The agent may make incentive payments to parties that purchase the principal’s good or service. In many cases, these incentives are not part of the contract with the principal, or a promise made explicitly or implicitly to the principal; although, the principal may be aware of the incentive program. The agent makes incentive payments to the principal’s customer, such as providing coupons or cash rebates, to increase the volume of transactions on which it earns its agency fee. These parties are not purchasing the agent’s goods or services (that is, the principal’s customer is not in the distribution chain).

Most TRG members supported the view that an entity’s customers include those in the distribution chain and might include a customer’s customer outside of the distribution chain. An entity must identify its customer in each revenue transaction and entities within the distribution chain. In addition, an entity that is acting as an agent (that is, arranging for another party to provide goods or services), might identify multiple customers depending on the facts and circumstances of the arrangement. That is, the entity might view both the principal and the end customer as customers in the arrangement. TRG members noted that under existing GAAP an entity might view the principal’s end customer as its customer, while others might not, and as a result there is some diversity in practice today about whether an entity that is an agent thinks its customer is only the principal. Regardless of whether an entity concludes that the principal’s end customer is also a customer of the entity, a payment to a principal’s end customer that was contractually required based on an agreement between the entity and the principal would represent consideration payable to a customer.