While Topic 606 requires accounting for a significant financing component apart from revenue, the standard does not include explicit guidance on how to calculate the interest income/expense. However, the standard includes guidance on estimating the discount rate and some examples (Example 26, Existence of a Significant Financing Component in the Contract, and Example 29, Advance Payment and Assessment of the Discount Rate, are included in this Q&A). Example 29 includes the calculation of interest expense in an advanced payment scenario. Some stakeholders have raised a question as to how to perform the calculations.

Paragraph 606-10-32-19 includes guidance on determining the discount rate in the standard. The standard also includes guidance on the presentation of the financing component in the income statement (paragraphs 606-10-32-20 and 606-10-32-204). Furthermore, Topic 606 includes some illustrations (Examples 26 and 29) of how to apply the guidance.

Because the standard does not provide guidance on subsequent accounting, entities should refer to respective GAAP (Subtopic 835-30) to determine the appropriate accounting.

Subtopic 835-30 provides guidance on subsequent measurement in situations in which imputation of interest is required. The guidance requires the use of the interest method. That is, with respect to a note for which the imputation of interest is required, the difference between the present value and the face amount shall be treated as discount or premium and amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period. The guidance allows for other methods of amortization to be used if the results obtained are not materially different from those that would result from the interest method. Although the guidance in Subtopic 835-30 provides guidance when there are extended payment terms to the customer, a similar calculation methodology would be applied to advance payments from a customer.