The staff notes that paragraph 606-10-32-15 clarifies that an entity must consider the effects of the time value of money when determining the transaction price. This evaluation would include consideration of whether a significant financing component exists as a result of a material right (that is, the evaluation would be the same as for any other performance obligation). However, consistent with the evaluation of whether a significant financing component exists in any other contract (that is, one that does not provide a material right to the customer), an entity would consider the guidance in paragraphs 606-10-32-17 through 32-18.

Paragraph 606-10-32-17(a) states that a contract would not have a significant financing component if a customer pays for a good or service in advance, and the timing of the transfer of those goods or services is at the discretion of the entity. Therefore, if the timing of when the customer will exercise its option is at the customer’s discretion, no significant financing component would exist. Similarly, as a practical expedient, paragraph 606-10-32-18 states that an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Absent applicability of the guidance in paragraphs 606-10-32-17(a) and 606-10-32-18, a significant financing component may exist as a result of providing a material right for which an entity, in effect, has received advanced payment. Determining whether providing a material right results in a significant financing component will require the use of judgment and will depend on the specific facts and circumstances underlying the material right.