Some stakeholders have questioned whether the practical expedient for measuring progress toward complete satisfaction of a performance obligation based on amounts to which the entity has a right to invoice may be applied to contracts with rates that change during the contract term or situations in which there are multiple rates for multiple goods or services. Examples of contracts in which the rates may change include:

Some stakeholders think that the practical expedient for measuring progress toward complete satisfaction of a performance obligation may be applied to the types of contracts listed above because they think the amounts billed correspond directly to the value to the customer.

Consider the following more detailed examples:

Paragraph 606-10-55-18 explains the circumstances in which an entity may apply the practical expedient. Contract A in Example 42, Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations, in Topic 606 illustrates a situation in which the practical expedient applies to a two-year cleaning services arrangement in which services are typically performed at least once per month. For services provided, the customer pays an hourly rate of $25. Paragraph 606-10-55-300 in the example notes that “because the entity bills a fixed amount for each hour of service provided, the entity has a right to invoice the customer in the amount that corresponds directly with the value of the entity’s performance completed to date in accordance with paragraph 606-10-55-18.”

Paragraph BC167 of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), states:

Some stakeholders, as well as the staff, think Example A above is a scenario that would qualify for the practical expedient because the amount that will be billed to Power Buyer by Power Seller corresponds directly with the value to the Power Buyer of Power Seller’s performance completed to date in accordance with paragraph 606-10-55-18. The amount that will be billed is based on both (a) the units of power transferred to the customer and (b) a rate per unit of power that is priced by reference to one or more market indicators (for example, the observable forward commodity price curve). While the rate per unit of power is not the same for the duration of the contract, the rates per unit reflect the value to the customer because the rates are based on one or more market indicators. When applying paragraph 606-10-55-18, some stakeholders and the staff think that a fixed price is not always required for the duration of the contract. However, a price increase or decrease must be based on the value of those later units to the customer. Determining whether the price change is consistent with the value to the customer often will require the use of judgment.

Additionally, these stakeholders and the staff think that for purposes of applying the practical expedient, the market prices or standalone selling prices might reflect value to the customer but are not required to be assessed to demonstrate that the amount invoiced reflects value to the customer. Rather, the phrase value to the customer is intended to indicate that judgment is required to assess whether the practical expedient can be applied. Market or standalone selling prices, or another means could be used to demonstrate that the amount invoiced to the customer corresponds directly to the value to the customer for the entity’s performance to date.

Some stakeholders and the staff also think that Example B above is a scenario that would qualify for the practical expedient because the amount billed to IT Buyer by IT Seller corresponds directly with the value to the IT Buyer of IT Seller’s performance to date in accordance with paragraph 606-10-55-18. The fixed minimum amount is not substantive (that is, the entity expects to exceed the minimum amounts, in part, on the basis of historical experience), and the amount billed to IT Buyer reflects the rates and amounts (price and quantities) for the activities provided. Similar to Example A, although the rates change for the respective activities over the duration of the arrangement, the rates reflect the value to the customer, which is corroborated through: (1) the benchmarking (market) adjustment and (2) declining costs (and level of effort) of providing the tasks that correspond with the declining pricing of the activities. Additionally, even though there are multiple activities in Example B, the conditions to apply the practical expedient in paragraph 606-10-55-18 are met because the amounts invoiced to IT Buyer correspond with the value to the IT Buyer of each incremental activity that the IT Seller provides to the IT Buyer (that is, the IT Seller’s performance completed to date).

The staff thinks that determining whether an entity can apply the practical expedient will require the use of judgment. It is important to note that the mere fact that an entity and its customer agree upon an invoice/payment schedule does not automatically mean the amount an entity has the right to invoice at a given point corresponds directly with the value to the customer for the goods or services provided to date. For example, the customer might request lower payments earlier in the duration of the contract and higher payments later in the duration to increase its operating cash flow in the short term. As another example, the entity might request a significant payment early in the duration of the contract to reduce credit risk or to have the customer demonstrate that it is committed to a long-term service arrangement.

Paragraph BC163 of Update 2014-09, standard states that “value to the customer is not intended to be assessed by reference to the market prices or standalone selling prices of the individual goods or services promised in the contract, nor is it intended to refer to the value that the customer perceives to be embodied in the goods or services.” The staff has become aware that some stakeholders think the description of the phrase value to the customer in that paragraph should be applied to the same phrase in paragraphs 606-10-55-17 through 55-18. However, the staff thinks that the language in that paragraph was not intended to be applied to paragraph 606-10-55-18 and that the phrase value to the customer is used in two different contexts. Paragraph 606-10-55-17 (and the related discussion in paragraph BC163) is in the context of measuring progress toward satisfaction of the performance obligation with a focus on the proportion of outputs delivered relative to total outputs in the performance obligation, not measurement and allocation of the transaction price and recognition.

Put another way, the discussion in paragraph BC163 (and paragraph 606-10-55-17) is about progress toward satisfying the performance obligation and, thus, has to do with how much or what proportion of the goods or services (quantities) have been delivered (but not the price). For example, for purposes of paragraph 606-10-55-17, an entity might consider the units produced to date (10) divided by the total expected units produced (100) to measure progress (10%). In contrast, paragraph 606-10-55-18 is about recognizing revenue on the basis of invoicing as it corresponds to the value transferred to the customer. This includes determining the revenue to be recognized, which involves multiplying the price assigned to the goods or services delivered by the measure of progress (that is, the quantities or units transferred). The intent of the practical expedient in paragraph 606-10-55-18 is that it is an expedient to Steps 3, 4, and 5 in Topic 606. This is corroborated by the existence of the related practical expedient for disclosure of remaining performance obligations included in paragraph 606-10-50-14, which provides relief from estimating the aggregate transaction price for remaining performance obligations.

In conclusion, the staff expects that some contracts with customers that do not have a fixed price per unit for the duration of the contract will qualify for the practical expedient. However, judgment will be required to assess whether the entity’s right to consideration from a customer corresponds directly to the value to the customer for performance completed to date. This assessment may include, but is not required to include, an assessment of market or standalone selling price.

The staff and TRG members noted that application of the practical expedient in those situations involves an analysis of the facts and circumstances of the arrangement. The objective of the analysis is to determine whether the amount invoiced for goods or services reasonably represents the value to the customer of the entity’s performance completed to date. For example, a contract to purchase electricity at prices that change each year based on the forward market price of electricity would qualify for the practical expedient if the rates per unit reflect the value of the provision of those units to the customer.

The staff, Board members, and TRG members also acknowledged that judgment will be required about whether the practical expedient can be applied in fact patterns that include upfront and back-end fees. An assessment of the significance of those upfront and back-end fees relative to the variable consideration in the arrangement likely would be important. Additionally, TRG members generally agreed that a series of distinct goods or services (in accordance with the guidance in paragraphs 606-10-25-14 through 25-15) could also be within the scope of the practical expedient in paragraph 606-10-55-18.