Stakeholders have different views about whether the guidance on allocating discounts or the guidance on allocating variable consideration should be applied in certain circumstances.

The staff thinks that paragraph 606-10-32-41 establishes a hierarchy for allocating variable consideration such that when a contract includes variable consideration, an entity should first apply the guidance on allocating variable consideration before considering the guidance on allocating discounts.

The staff notes that, in accordance with paragraph 606-10-32-41, only after the entity considers whether all or a portion of the variable consideration in the contract relates to a specific part(s) of the contract should the entity consider the remaining paragraphs on allocating the transaction price to the performance obligations in the contract (that is, paragraphs 606-10-32-28 through 606-10-32-38). Those remaining paragraphs include the specific guidance on allocating a discount. The staff thinks that guidance is clear that an entity first considers the allocation of variable consideration because the guidance states that the other paragraphs “shall be applied to allocate the remaining amount of the transaction price” (paragraph 606-10-32-41). Because an entity is first required to identify variable consideration and determine whether it should allocate variable consideration to one or some, but not all, performance obligations (or distinct goods or services that comprise a single performance obligation in accordance with paragraph 606-10-25-14(b)) based on the guidance above, the entity would consider the requirements for allocating a discount only if the discount is not variable consideration or the entity does not meet the criteria to allocate variable consideration to a specific part of the contract.

The staff thinks it is important to emphasize that the guidance on allocating variable consideration in paragraphs 606-10-32-39 and 32-40 does not apply to consideration that is not variable consideration. The mere use of the terms discount or rebate in paragraph 606-10-32-6 does not mean any contract that contains a discount, or a rebate contains variable consideration. If the amount of a discount or a rebate in a contract is fixed and not contingent (for example, a CU100 discount or rebate received solely as a consequence of entering into the contract), that discount or rebate is not variable consideration.

TRG members agreed with the above and also pointed out that not all discounts are variable and that if a discount is fixed, it does not result in variable consideration. In those cases, an entity would apply the guidance on allocating discounts and would not consider the guidance on allocating variable consideration.