The staff is aware that some stakeholders have questioned whether a contract includes variable consideration if the contract includes an undefined quantity of outputs, but the contractual rate per unit of output is fixed. For example, a transaction processor has a contract with a customer where the price per transaction is $0.001 per transaction, but the quantity of transactions is not fixed.

Topic 606, specifically paragraphs 606-10-32-5 through 32-8, includes guidance on variable consideration.

The staff thinks the determination of whether an arrangement includes variable consideration based on the paragraphs referenced above is dependent upon the evaluation of the entity’s promise. If the nature of the promise is to perform an unknown quantity of tasks throughout the contract period and the consideration received is contingent upon the quantity completed, the total transaction price would be variable because it is based on the occurrence or nonoccurrence of events outside the entity’s control (for example, the customer’s usage or other events) and the contract has a range of possible transaction prices. Said differently, if there is an undefined quantity of outputs in a contract but the contractual rate per unit of output is fixed, the consideration is variable. In contrast, if the nature of the promise is to perform a defined number of distinct services at a fixed price per unit, then the consideration would be fixed because the total transaction price is known. An entity would need to consider all substantive terms of the contract, which could include contractual minimums or other clauses that would make some or all of the consideration fixed. TRG members further highlighted that quantities of a good or service that represent “optional purchases” do not create variable consideration.

In the following examples (A,B, and D), the staff thinks that if the nature of the promise is a daily integrated service or a promise to stand ready to perform, rather than to provide a defined number of transactions, then the consideration would be variable because the consideration to be paid is unknown. In Example A, the entity would have the right to bill based upon the units consumed of the various tasks that day. Because the number of units are not defined each day (or for the entire contract), the consideration would vary each day based upon the level of activity. For example, IT Seller may earn CU100 for its activities during one distinct day of service and CU200 in the next day but not earn a known fixed amount of consideration. Similarly, in Examples B and D, because there is not a defined quantity of transactions in the contract, the transaction price would be variable.

Information technology (IT) Seller and IT Buyer execute a 10-year IT outsourcing arrangement in which IT Seller provides continuous delivery of outsourced activities over the contract term. For example, the vendor will provide server capacity, manage the customer’s software portfolio, and run an IT help desk. The total monthly invoice is calculated based on different units consumed for the respective activities. For example, the billings might be based on millions of instructions per second of computing power (MIPs), number of software applications used, or number of employees supported, and the price per unit differs for each type of activity. Before the delivery of the service, IT Seller performs certain initial set-up activities to be in a position to provide the other services in the contract. IT Seller charges the IT Buyer a nonrefundable upfront fee related to the transition activities. IT Seller concludes that the set-up activities do not transfer services to the customer. The per unit price charged by IT Seller declines over the life of the contract. The agreed upon pricing at the onset of the contract is considered to reflect market pricing. The pricing decreases to reflect the associated costs decreasing over the term of the contract as the level of effort to complete the tasks decreases. Initially, the tasks are performed by more expensive personnel for activities that require more effort. Later in the contract, the level of effort for the activities decreases, and the tasks are performed by less expensive personnel. The contract includes a price benchmarking clause whereby the IT Buyer engages a third-party benchmarking firm to compare the contract pricing to current market rates at certain points in the contract term. There is an automatic prospective price adjustment if the benchmark is significantly below IT Seller’s price. Assume IT Seller concludes that there is a single performance obligation that is satisfied over time because the customer simultaneously receives and consumes the benefits provided by its services as it performs.

Transaction Processer (TP) enters into a 10-year agreement with a customer. Over the 10-year period, TP will provide continuous access to its system and process all transactions on behalf of the customer. The customer is obligated to use TP’s system to process all of its transactions; however, the ultimate quantity of transactions is not known. TP concludes that the customer simultaneously receives and consumes the benefits as it performs. TP charges the customer on a per transaction basis. For each transaction, the customer is charged a contractual rate per transaction and a percentage of the total dollars processed. TP also charges the customer a fixed upfront fee at the beginning of the contract.

Franchisor grants franchisee a license that provides franchisee with the right to use franchisor’s trade name and sell its products for 10 years. Franchisor will receive a sales-based royalty of 5 percent of the franchisee’s sales for the term of the license as well as a fixed fee. Franchisor concludes that the nature of its promise is to provide a right to access the intellectual property throughout the license period, and the performance obligation is satisfied over time because franchisee simultaneously will receive and consume the benefit from franchisor’s performance of providing access to its intellectual property.

In the following example, the staff thinks it is clear that the monthly fee based on a percentage of sales and the annual incentive fee are variable. If the nature of the entity’s promise is to provide the daily management service and not a specified amount of labor hours at a rate per hour, the staff and other stakeholders in the hospitality industry also think that the cost reimbursements are variable because the amount is not known at the beginning of the contract and the amount that the entity will be entitled to changes based upon the requirements to fulfill the contract for each day of distinct service.

Hotel manager (HM) enters into a 20-year agreement to manage properties on the behalf of the customer. HM receives monthly consideration based on 1 percent of monthly rental revenue, reimbursement of labor costs incurred to perform the service, and an annual incentive payment based upon 8% of gross operating profit. HM concludes that the customer simultaneously receives and consumes the benefits provided by its services as it performs.