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Promises in a contract can be explicit, or implicit if the promises create a valid expectation that the reporting entity will provide a good or service based on the reporting entity’s customary business practices, published policies, or specific statements. It is therefore important to understand a reporting entity’s policies and practices, representations made during contract negotiations, marketing materials, and business strategies when identifying the promises in an arrangement.
Promised goods or services include, but are not limited to:
  • Transferring produced goods or reselling purchased goods
  • Arranging for another party to transfer goods or services
  • Standing ready to provide goods or services in the future
  • Building, designing, manufacturing, or creating an asset on behalf of a customer
  • Granting a right to use or access to intangible assets, such as intellectual property (refer to RR 9.5)
  • Granting an option to purchase additional goods or services that provides a material right to the customer (refer to RR 3.5)
  • Performing contractually agreed-upon tasks

3.2.1 Immaterial promises

The revenue standard states that a reporting entity is not required to separately account for promised goods or services that are immaterial in the context of the contract.

ASC 606-10-25-16A

An entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. If the revenue related to a performance obligation that includes goods or services that are immaterial in the context of the contract is recognized before those immaterial goods or services are transferred to the customer, then the related costs to transfer those goods or services shall be accrued.

ASC 606-10-25-16B

An entity shall not apply the guidance in paragraph 606-10-25-16A to a customer option to acquire additional goods or services that provides the customer with a material right, in accordance with paragraphs 606-10-55-41 through 55-45.

Assessing whether promised goods or services are immaterial in the context of the contract requires judgment. Management should consider the nature of the contract and the relative significance of a particular promised good or service to the arrangement as a whole. Management should evaluate both quantitative and qualitative factors, including the customer’s perspective, in this assessment. For example, if a promised good or service is featured prominently in the reporting entity’s marketing materials, this likely indicates that the good or service is not immaterial from the customer's perspective. If multiple goods or services are considered to be individually immaterial in the context of the contract, but those items are material in the aggregate, management should not disregard those goods or services when identifying performance obligations.
If revenue is recognized prior to transferring immaterial goods or services, the related costs should be accrued. The requirement to accrue costs related to immaterial promises only applies to items that are, in fact, promises to the customer. For example, costs that will be incurred to operate a call desk that is broadly available to answer questions about a product would typically not be accrued as this activity would not fulfill a promise to a customer.
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