Some stakeholders have questioned when an entity should recognize consideration payable to a customer, which occurs in Step 3 (Determine the Transaction Price) of Topic 606. The question arises due to the interaction of the guidance on constraining variable consideration and the guidance on consideration payable to the customer.

Paragraph 606-10-32-27 provides guidance on the timing of recognizing consideration payable to a customer. Paragraph 606-10-32-25 provides guidance on recognizing consideration payable to a customer that is variable. Paragraph 606-10-32-6 provides guidance on what constitutes variable consideration.

The question on consideration payable to a customer in Topic 606 is related to situations in which an entity promises to pay consideration to a customer after it recognizes revenue for the transfer of goods or services to the customer. This is because some stakeholders assert that the variable consideration guidance would require recognition of the consideration payable to a customer (that is, a reduction of revenue) when revenue is recognized; whereas, the guidance on consideration payable to the customer might indicate that a later date is acceptable.

Consider the following example:

The specific facts and circumstances of the arrangement will affect the entity’s conclusion about whether the CU1,000 of consideration payable to a customer (1,000 units x CU1/unit rebate, for simplicity, ignore the effects of potential breakage) should be recognized on December 28th (the date revenue is recognized), January 2nd (the date the entity promises to pay the consideration to its customer), or some date in between. In this example, the staff does not think March 30th would be an acceptable date to recognize the consideration payable to the customer. If the entity waited until March 30th to recognize the reduction in revenue, the CU1,000 reduction in revenue would not be recognized until after it recognizes revenue and after it makes a promise to pay the customer.

Paragraph 606-10-32-43 states that changes in the transaction price for satisfied performance obligations (such as, in the example above, the transferred products) shall be recognized as revenue, or as a reduction in revenue, in the period in which the transaction price changes. Therefore, beginning on the date the entity considers offering the coupons, the entity should consider whether there is a change in the transaction price (that is, has the amount of consideration to which the entity expects to be entitled for transferring the products changed).

Simply having the thought of, or having some initial preliminary discussions about, a potential coupon offering does not necessarily result in a change to the transaction price. However, the entity might no longer reasonably expect to be entitled to CU10,000 for the 1,000 products even before the January 2nd date upon which it promises the consideration to the customer (for example, on December 31st the entity committed to the coupon program). Therefore, the date at which the transaction price changes will be a matter of judgment.

If the products are delivered on December 28th and the entity recognized CU10,000 as revenue, and the entity subsequently concludes there is a change in the transaction price downward to CU9,000, then that CU1,000 should be recognized as a reduction to revenue in the period in which it determines that the transaction price has changed.

In the example above, the entity provides the customer with a CU1-off coupon, which is a form of variable consideration. Paragraph 606-10-32-6 describes consideration payable to a customer as a type of variable consideration. The entity would consider the guidance on variable consideration and the guidance on consideration payable to customer. That is, the two concepts are related, and an entity does not only look to one or the other.

The guidance indicates an entity would estimate the consideration it expects to pay the retail store chain and include that amount in the transaction price (Step 3). Because the transaction price includes variable consideration, the entity would follow the guidance in Step 3 on constraining estimates of variable consideration.

The entity also would consider whether an implicit promise for the coupon has been made before making the formal promise. The guidance in paragraph 606-10-32-25(b) states that a promise of consideration to a customer might be implied by an entity’s customary business practices. Therefore, in many cases the promise to pay consideration may occur at a point before the formal offer is made.

Regardless of whether an entity was following the guidance on variable consideration or consideration payable to the customer (including consideration of the guidance on changes in transaction price), the recognition of the sales incentive (the coupon) would result in a reversal of revenue. That reversal of revenue should be made at the earlier of the date that there is a change in the transaction price in accordance with paragraph 606-10-32-25 or the date at which the consideration payable to a customer is promised in accordance with paragraph 606-10-32-27.

As described in paragraph 606-10-05-3, the core principle of the standard is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. If the entity never expects to be entitled to that consideration, it would not be appropriate to recognize the reduction of revenue at a later date. Furthermore, the notion of the constraint on variable consideration is that revenue should not be recognized if it is probable [highly probable] of significant reversal. In this example, a delay in recognizing the effect of the coupon might result in a significant reversal of revenue which would be in conflict with the constraint principle.

TRG members discussed when an entity should recognize consideration payable to a customer as a reduction to revenue. The guidance on consideration payable to a customer in paragraph 606-10-32-27 states that such amounts should be recognized as a reduction of revenue at the later of when the related revenue is recognized or the entity pays or promises to pay such consideration (promises could be implied by customary business practices). This is referred to as the “later of guidance” here. Some TRG members highlighted that if an entity intends to provide its customer with a price concession when entering into the contract (regardless of the form of the price concession, for example, cash payment, rebate, account credit, or coupon), then the contract includes variable consideration and it should consider that price concession when estimating variable consideration (subject to the constraint on variable consideration). In determining whether an entity intends to provide the customer with a price concession, the entity should consider the guidance in paragraphs 606-10-32-6 through 32-7. If the contract includes variable consideration because of an expected price concession, then the entity would not wait until it has communicated the price concession to the customer to recognize a reduction in revenue under the later of guidance. Instead, the entity would account for the variable consideration in accordance with paragraph 606-10-32-14.

TRG members agreed that the later of guidance in Topic 606 would be applied in more limited circumstances than the later of guidance in existing GAAP. This is because the core principle of Topic 606 is that an entity recognizes revenue in an amount that reflects the consideration to which the entity expects to be entitled. Consistent with that core principle, Topic 606 includes estimates of variable consideration (subject to the constraint) in the transaction price, and it requires an entity to reassess the transaction price when the amount to which the entity expects to be entitled changes. Under Topic 606, in accordance with paragraphs 606-10-32-6 through 32-7, an entity would account for consideration payable to a customer as variable consideration when either the customer has a valid expectation based on customary business practices or the entity’s intention is to provide consideration to the customer when entering into the contract.