Some stakeholders have questioned whether the guidance that includes the objective for adjusting the promised amount of consideration for a significant financing component (paragraph 606-10-32-16) implies that there is never a significant financing component when there is not a difference between the amount of promised consideration and the cash selling price. In certain industries, it may be common for the promised consideration and cash selling price to be equal. Consider the following examples.

In the examples above, the list price of the goods is equal to the promised consideration in the contract. However, it is important to note that the list price might not always equal the cash selling price and a contract might have an implied interest rate that is different from a stated interest rate. For example, if a customer offers to pay cash upfront when the entity is offering “free” financing, the customer might be able to pay less than the list price. That is, the true cash selling price might be (in fact, may be likely to be) less than the list price. This notion is consistent in concept with the guidance in paragraph 606-10-32-32, which states that a contractually stated price or a list price for a good or service may be (but shall not be presumed to be) the standalone selling price of that good or service.

In the examples above, if the list price, the cash selling price, and the promised consideration are all equal, the respective entities should not automatically assume that there is no significant financing component. The difference, if any, between the amount of promised consideration and the cash selling price is a consideration (that is, it is one of two factors in paragraph 606-10-32-16, not the only consideration), not a presumption, in determining whether a significant financing component exists. The guidance in paragraph 606-10-32-16 further specifies that an entity should consider all relevant facts and circumstances. Accordingly, this one fact, that the cash selling price is equal to the selling price in the contract, would not be the totality of the assessment. However, if the list price, the cash selling price, and the promised consideration are all, in fact, equal (including after careful consideration of whether the list price is the cash selling price), that might indicate that the contract does not include a significant financing component.

That is not to say that if list price, cash selling price, and promised consideration are equal that a financing component cannot exist. Rather, entities should carefully evaluate whether those items are all, in fact, equal. Determining a “cash selling price” may require judgment and the fact that an entity provides “zero interest financing” does not necessarily mean that the cash selling price is the same as the price another customer will pay over time. Entities would consider the cash selling price as compared to the promised consideration in making the evaluation based on the overall facts and circumstances of the arrangement.

It also may be possible that in these type of scenarios (that is, zero implied interest) that a financing component exists but that it may not be significant. Entities will need to apply judgment in determining whether the financing component is significant or not.