Changes in the fair value of noncash consideration can relate to the form of the consideration or to other reasons. For example, an entity might be entitled to receive equity of its customer as consideration, and the value of the equity could change before it is transferred to the entity. Changes in the fair value of noncash consideration that are due to the form of the consideration are not subject to the constraint on variable consideration.
Noncash consideration that is variable for reasons other than only the form of the consideration is included in the transaction price, but is subject to the constraint on variable consideration. For example, a reporting entity might receive noncash consideration upon reaching certain performance milestones. The amount of the noncash consideration varies depending on the likelihood that the reporting entity will reach the milestone. The consideration in that situation is subject to the constraint, similar to other variable consideration.
Judgment may be needed to determine the reasons for a change in the value of noncash consideration, particularly when the change relates to both the form of the consideration and to the reporting entity’s performance. ASC 606
specifies that if there is variability due to both the form of the consideration and other reasons, a reporting entity should apply the variable consideration guidance only to the variability resulting from reasons other than the form of the consideration.
Example RR 4-21 illustrates variability that results for reasons other than the form of the consideration.
EXAMPLE RR 4-21
Noncash consideration – variable for reasons other than the form of the consideration
MachineCo enters into a contract to build a machine for Manufacturer and is entitled to a bonus in the form of 10,000 shares of Manufacturer common stock if the machine is delivered within six months. MachineCo does not have a history of building similar machines within six months and cannot conclude that it is probable that a significant reversal will not occur with regards to the bonus. For purposes of this example, assume that the arrangement does not include a derivative.
How should MachineCo account for the noncash bonus?
MachineCo should consider the guidance on variable consideration since the consideration varies based on whether the machine is delivered by a specific date. MachineCo should not include the shares in the transaction price as the amount of variable consideration is constrained. MachineCo should update its estimate each period to determine if and when the shares should be included in the transaction price.