The revenue standard provides the following guidance on determining the transaction price.
An entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
The transaction price is the amount that a reporting entity allocates to the performance obligations identified in the contract and, therefore, represents the amount of revenue recognized as those performance obligations are satisfied. The transaction price excludes amounts collected on behalf of third parties, such as sales taxes the reporting entity collects on behalf of the government. Refer to RR 10.4
and RR 10.5
for further discussion of amounts collected from customers on behalf of third parties.
Determining the transaction price can be straightforward, such as where a contract is for a fixed amount of consideration in return for a fixed number of goods or services in a reasonably short timeframe. Complexities can arise where a contract includes any of the following:
- Variable consideration
- A significant financing component
- Noncash consideration
- Consideration payable to a customer
Contractually stated prices for goods or services might not represent the amount of consideration that a reporting entity expects to be entitled to as a result of its customary business practices with customers. For example, management should consider whether the reporting entity has a practice of providing price concessions to customers (refer to RR 220.127.116.11
The amounts to which the reporting entity is entitled under the contract could in some instances be paid by other parties. For example, a manufacturer might offer a coupon to end customers that will be redeemed by retailers. The retailer should include the consideration received from both the end customer and any reimbursement from the manufacturer in its assessment of the transaction price.
Management should assume that the contract will be fulfilled as agreed upon and not cancelled, renewed, or modified when determining the transaction price. The transaction price also generally does not include estimates of consideration from the future exercise of options for additional goods and services, because until a customer exercises that right, the reporting entity does not have a right to consideration (refer to RR 3.5
). An exception is provided as a practical alternative for customer options that meet certain criteria (for example, certain contract renewals) that allows management to estimate goods or services to be provided under the option when determining the transaction price (refer to RR 7.3
The transaction price is generally not adjusted to reflect the customer's credit risk, meaning the risk that the customer will not pay the reporting entity the amount to which the reporting entity is entitled under the contract. The exception is where the arrangement contains a significant financing component, as the financing component is determined using a discount rate that reflects the customer's creditworthiness (refer to RR 4.4
Once a contract asset or receivable is recorded, impairment losses relating to a customer’s credit risk are measured based on the guidance in ASC 310
(credit losses are determined based on the guidance in ASC 326
, Financial instruments – credit losses
, once adopted). Management needs to consider whether subsequent billing adjustments or estimates of collection are a change in the transaction price (impacting revenue) or an adjustment to the measurement of the contract asset or receivable under ASC 310
, once adopted). The facts and circumstances specific to the adjustment should be considered, including the reporting entity’s past business practices and ongoing relationship with a customer, to make this determination.