An area of judgment in Topic 606 is determining whether a situation in which an entity determines that it will collect less than the stated contract price is the result of a collectibility issue or a price concession. If an entity determines that it will collect less than the stated contract price due to a price concession (regardless of whether the price concession is implicit or explicit), then that amount is accounted for as a reduction of the transaction price. That is, the amount is considered to be variable consideration that is subject to the constraint on variable consideration in determining the transaction price (Step 3 of Topic 606) rather than an input into the collectibility assessment in Step 1. Therefore, the determination about whether something is a price concession or a collectibility adjustment may have a significant effect on an entity’s revenue recognition.

If an entity concludes that it is offering a price concession, then the entity would estimate the transaction price in accordance with paragraph 606-10-32-8 and constrain some or all of the amount of variable consideration, as applicable, in accordance with paragraphs 606-10-32-11 through 32-12.

Paragraph 606-10-32-7 provides guidance on what factors to consider in determining whether an entity has offered a price concession. This suggests that an entity’s past experience provides evidence in assessing whether a price concession has been offered to a customer.

Example 3, Implicit Price Concession, in the Illustrations to Topic 606 provides further guidance on evaluating whether an entity has offered an implicit price concession. In the first paragraph of Example 3, the entity provides services before the entity has assessed whether the customer is committed to the contract; and therefore, before the criteria in Step 1 have been met.

After providing the services, the entity assesses if the criteria in Step 1 have been met and determines that it does have a contract with the customer. The entity assesses the amount of consideration to which it will be entitled to and whether the reduction from the standard billing rate is due to collectibility issues or due to an implicit price concession. The remaining paragraphs in Example 3 discuss the factors that lead the entity to conclude that a price concession has been offered to the customer. Those factors include additional information about the patient’s intention and ability to pay, and the entity’s intentions with regards to the services provided and acceptance of consideration, which are highlighted in paragraphs 606-10-55-103 through 55-105 of Example 3.

The basis for conclusions of Topic 606 (Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606)) also discusses how an entity should consider its intentions and not only refer to past experience in assessing if a price concession has been granted to a customer (paragraph BC193).

While Topic 606 provides examples of factors to consider in the illustrations and basis for conclusions, the Board also acknowledged that it may be difficult in some cases to distinguish between a price concession and customer credit risk. Consistent with current GAAP, entities might need to apply judgment (paragraph BC194).

Topic 606 indicates that an entity should look to past practice as well as the entity’s intentions when entering into the contract with a customer. The determination of whether a reduction in consideration is due to concerns about collectibility or as a result of a price concession will require an assessment of the specific facts and circumstances and require significant judgment, which is consistent with current GAAP.