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2.8 Combining contracts
Publication date: 30 Nov 2023
us Revenue guide
Multiple contracts will need to be combined and accounted for as a single arrangement in some situations. This is the case when the economics of the individual contracts cannot be understood without reference to the arrangement as a whole.
Excerpt from ASC 606-10-25-9
An entity shall combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met:
a. The contracts are negotiated as a package with a single commercial objective;
b. The amount of consideration to be paid in one contract depends on the price or performance of the other contract;
c. The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation
The determination of whether to combine two or more contracts is made at contract inception. Contracts must be entered into with the same customer (or related parties of the customer) at or near the same time in order to account for them as a single contract. Contracts between the reporting entity and related parties (as defined in ASC 850, Related Party Disclosures) of the customer should be combined if the criteria above are met. Judgment will be needed to determine what is “at or near the same time,” but the longer the period between the contracts, the more likely circumstances have changed that affect the contract negotiations.
Contracts might have a single commercial objective if a contract would be loss-making without taking into account the consideration received under another contract. Contracts should also be combined if the performance provided under one contract affects the consideration to be paid under another contract. This would be the case when failure to perform under one contract affects the amount paid under another contract.
The guidance on identifying performance obligations (refer to RR 3) should be considered whenever reporting entities have multiple contracts with the same customer that were entered into at or near the same time. Promises in a contract that are not distinct cannot be accounted for as if they are distinct solely because they arise from different contracts. For example, a contract for the sale of specialized equipment should not be accounted for separately from a second contract for significant customization and modification of the equipment. The specialized equipment and customization and modification services are likely a single performance obligation in this situation.
Only contracts entered into at or near the same time are assessed under the contract combination guidance. Promises made subsequently that were not anticipated at contract inception (or implied based on the reporting entity's business practices) are generally accounted for as contract modifications.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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