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4.6 Consideration payable to a customer
Publication date: 31 Oct 2022 (updated 30 Nov 2023)
us Revenue guide
A reporting entity might pay, or expect to pay, consideration to its customer. The consideration payable can be cash, either in the form of rebates or upfront payments, or could alternatively be a credit or some other form of incentive that reduces amounts owed to the reporting entity by a customer. If the consideration payable to a customer includes a variable amount, the reporting entity should estimate the transaction price including assessing whether the estimate of variable consideration is constrained. The revenue standard addresses the accounting for consideration payable to a customer as follows. (See RR 4.6.6 for amendments issued in June 2018.)
Excerpt from ASC 606-10-32-25
Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to a customer (or to other parties that purchase the entity's goods or services from the customer). Consideration payable to a customer also includes credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity (or to other parties that purchase the entity's goods or services from the customer). An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service…that the customer transfers to the entity.
Management should consider whether payments to customers are related to a revenue contract even if the timing of the payment is not concurrent with a revenue transaction. Such payments could nonetheless be economically linked to a revenue contract; for example, the payment could represent a modification to the transaction price in a contract with a customer. Management will therefore need to apply judgment to identify payments to customers that are economically linked to a revenue contract. Refer to Revenue TRG Memo No. 37 and the related meeting minutes in Revenue TRG Memo No. 44 for further discussion of this topic.
4.6.1 Income statement classification of payments to a customer
Consideration payable to a customer is recorded as a reduction of the arrangement's transaction price, thereby reducing the amount of revenue recognized, unless the payment is for a distinct good or service received from the customer. Refer to RR 3 for a discussion on determining when a good or service is distinct. Consideration paid for a distinct good or service is accounted for in the same way as the reporting entity accounts for other purchases from suppliers.
Determining whether a payment is for a distinct good or service received from a customer requires judgment. A reporting entity might be paying a customer for a distinct good or service if the reporting entity is purchasing something from the customer that is normally sold by that customer. Management also needs to assess whether the consideration it pays for distinct goods or services from its customer represents the fair value of those goods or services. Consideration paid that is in excess of the fair value of the goods or services received reduces the transaction price of the arrangement with the customer because the excess amounts represent a discount to the customer.
It can be difficult to determine the fair value of the distinct goods or services received from the customer in some situations. A reporting entity that is not able to determine the fair value of the goods or services received should account for all of the consideration paid or payable to the customer as a reduction of the transaction price since it is unable to determine the portion of the payment that is a discount provided to the customer.
Example RR 4-24, Example RR 4-25, Example RR 4-26, and Example RR 4-27 illustrate the accounting for consideration payable to a customer. This concept is also illustrated in Example 32 of the revenue standard (ASC 606-10-55-252 through ASC 606-10-55-254).
EXAMPLE RR 4-24
Consideration payable to customers – no distinct good or service received
Consideration payable to customers – no distinct good or service received
Producer sells energy drinks to Retailer, a convenience store. Producer also pays Retailer a fee to ensure that its products receive prominent placement on store shelves (that is, a slotting fee).
How should Producer account for the slotting fees paid to Retailer?
Analysis
Producer should reduce the transaction price for the sale of the energy drinks by the amount of slotting fees paid to Retailer. Producer does not receive a good or service that is distinct in exchange for the payment to Retailer.
EXAMPLE RR 4-25
Consideration payable to customers – payment for a distinct service
MobileCo sells 1,000 phones to Retailer for $100,000. The contract includes an advertising arrangement that requires MobileCo to pay $10,000 toward a specific advertising promotion that Retailer will provide. Retailer will provide the advertising on strategically located billboards and in local advertisements. MobileCo could have elected to engage a third party to provide similar advertising services at a cost of $10,000.
How should MobileCo account for the payment to Retailer for advertising?
Analysis
MobileCo should account for the payment to Retailer consistent with other purchases of advertising services. The payment from MobileCo to Retailer is consideration for a distinct service provided by Retailer and reflects fair value. The advertising is distinct because MobileCo could have engaged a third party who is not its customer to perform similar services. The transaction price for the sale of the phones is $100,000 and is not affected by the payment made to Retailer.
EXAMPLE RR 4-26
Consideration payable to customers – payment for a distinct service in excess of fair value
MobileCo sells 1,000 phones to Retailer for $100,000. The contract includes an advertising arrangement that requires MobileCo to pay $10,000 toward a specific advertising promotion that Retailer will provide. Retailer will provide the advertising on strategically located billboards and in local advertisements. MobileCo could have elected to engage a third party to provide similar advertising services at a cost of $8,000.
How should MobileCo account for the payment to Retailer for advertising?
Analysis
The amount of the payment that represents fair value of the advertising service ($8,000) is accounted for consistent with other purchases of advertising services because it is consideration for a distinct service. The excess amount of the payment over the fair value of the services ($2,000) is a reduction of the transaction price for the sale of phones. The transaction price for the sale of the phones is $98,000.
EXAMPLE RR 4-27
Consideration payable to customers — advertising allowance
Manufacturer enters into a contract to sell toys to Retailer. As part of the contract, Manufacturer agrees to provide Retailer an advertising allowance equal to 3% of total purchases made by Retailer, payable at the end of each quarter. Retailer has discretion over use of the allowance and is not required to provide Manufacturer with supporting documentation of how the allowance was utilized.
How should Manufacturer account for the advertising allowance?
Analysis
Manufacturer would likely conclude in this fact pattern that it does not receive a distinct good or service in exchange for the allowance paid to Retailer. The allowance is in substance a discount on the purchases made by Retailer. Manufacturer should therefore account for the allowance as a reduction of the transaction price of the toys sold to Retailer.
4.6.2 Identifying a reporting entity’s "customer"
A reporting entity might make payments directly to its customer, or make payments to another party that purchases the reporting entity’s goods or services from its customer (that is, a “customer’s customer” within the distribution chain), as illustrated in Figure RR 4-1.
Figure RR 4-1
Example of a payment to a customer’s customer in the distribution chain
Example of a payment to a customer’s customer in the distribution chain
Payments made by a reporting entity to its customer’s customer are assessed and accounted for the same as those paid directly to the reporting entity’s customer if those parties receiving the payments are purchasing the reporting entity’s goods and services.
Example RR 4-28 illustrates an arrangement with a payment made by a reporting entity to its reseller’s customer.
EXAMPLE RR 4-28
Consideration payable to customers – payment to reseller's customer
ElectronicsCo sells televisions to Retailer that Retailer sells to end customers. ElectronicsCo runs a promotion during which it will pay a rebate to end customers that purchase a television from Retailer.
How should ElectronicsCo account for the rebate payment to the end customer?
Analysis
ElectronicsCo should account for the rebate in the same manner as if it were paid directly to the Retailer. Payments to a customer’s customer within the distribution chain are accounted for in the same way as payments to a customer under the revenue standard.
In certain arrangements, reporting entities provide cash incentives to end consumers that are not their direct customers and do not purchase the reporting entities’ goods or services within the distribution chain, as depicted in Figure RR 4-2.
Figure RR 4-2
Example of a payment to an end consumer that does not purchase the reporting entity’s goods or services
Example of a payment to an end consumer that does not purchase the reporting entity’s goods or services
Management must first identify whether the end consumer is the reporting entity’s customer under the revenue standard. This assessment requires judgment. Management should also consider whether a payment to an end consumer is provided on behalf of the reporting entity’s customer (for example, the merchant in Figure RR 4-2). A promise to make a payment on a customer’s behalf could either be explicitly stated in the contract with the customer or implied based on the reporting entity’s customary business practices, published policies, or specific statements (see RR 3.2.2). If a reporting entity makes a payment to an end consumer on behalf of its customer, the payment would be treated the same as a payment made directly to the customer. Refer to Revenue TRG Memo No. 37 and the related meeting minutes in Revenue TRG Memo No. 44 for further discussion of this topic. Example RR 4-29 illustrates an arrangement with a payment made by an agent to an end consumer.
EXAMPLE RR 4-29
Consideration payable to customers – agent’s payment to end consumer
TravelCo sells airline tickets to end consumers on behalf of Airline. TravelCo concludes that it is acting as an agent in the airline ticket sale transactions (refer to RR 10 for further discussion on principal versus agent considerations). TravelCo offers a $10 coupon to end consumers in order to increase the volume of airline ticket sales on which it earns a commission.
How should TravelCo account for the coupons offered to end consumers?
Analysis
TravelCo must identify its customer (or customers) in order to determine whether the coupons represent consideration payable to a customer. The coupons represent consideration payable to a customer if (1) TravelCo determines the end consumers are its customers, or (2) TravelCo determines the end consumers are not its customers, but it is making the payment on behalf of Airline (its customer). TravelCo should consider as part of this assessment whether there is an implied promise that it will provide coupons to the end consumer on Airline’s behalf (for example, coupons offered as part of a promotion specific to Airline). If the coupons represent consideration payable to a customer, TravelCo would record the coupons as a reduction of its agency commission as it does not receive a distinct good or service in exchange for the payment (see RR 4.6.1). Conversely, the coupons would generally be recorded as a marketing expense if the coupons do not represent consideration payable to a customer.
4.6.3 Timing of recognition of payments made to a customer
The revenue standard provides guidance on when a reporting entity should reduce revenue for consideration paid to a customer.
If consideration payable to a customer is accounted for as a reduction of the transaction price, an entity shall recognize the reduction of revenue when (or as) the later of either of the following events occurs:
a. The entity recognizes revenue for the transfer of the related goods or services to the customer
b. The entity pays or promises to pay the consideration (even if the payment is conditional on a future event). That promise might be implied by the entity’s customary business practices.
Management should consider whether a payment it expects to make to a customer (for example, a rebate) is a price concession when assessing the terms of the contract. A price concession is a form of variable consideration, as discussed in RR 4.3.3.1, and should be estimated, including assessment of the variable consideration constraint. A payment to a customer should also be accounted for if it is implied, even if the reporting entity has not yet explicitly communicated its intent to make the payment to the customer. Judgment may be required to determine whether a reporting entity intends to make a customer payment in the form of a price concession and whether a payment is implied by the reporting entity’s customary business practices. Refer to Revenue TRG Memo No. 37 and the related meeting minutes in Revenue TRG Memo No. 44 for further discussion of this topic.
Example RR 4-30 illustrates the timing of recognition for payments to customers that are a reduction of revenue.
Example RR 4-30 illustrates the timing of recognition for payments to customers that are a reduction of revenue.
EXAMPLE RR 4-30
Consideration payable to customers – implied promise to pay consideration
CoffeeCo sells coffee products to Retailer. On December 1, 20X1, CoffeeCo decides that it will issue coupons directly to end consumers that provide a $1 discount on each bag of coffee purchased. CoffeeCo has a history of providing similar coupons.
CoffeeCo delivers a shipment of coffee to Retailer on December 28, 20X1 and recognizes revenue. The coupon is offered to end consumers on January 2, 20X2 and CoffeeCo reasonably expects that the coupons will be used to purchase products already shipped to Retailer. CoffeeCo will reimburse Retailer for any coupons redeemed by end consumers.
When should CoffeeCo record the revenue reduction for estimated coupon redemptions?
Analysis
CoffeeCo should reduce the transaction price for estimated coupon redemptions when it recognizes revenue upon transfer of the coffee to Retailer on December 28, 20X1. Although CoffeeCo has not yet communicated the coupon offering, CoffeeCo has a customary business practice of providing coupons and has the intent to provide coupons (a form of price concession) related to the shipment. Therefore, CoffeeCo should account for the coupons following the guidance on variable consideration.
4.6.4 Payments to customers that exceed the transaction price
In some cases, a payment to a customer that is not in exchange for a distinct good or service could exceed the transaction price for the current contract. Accounting for the excess payment (“negative revenue”) could require judgment. Management should obtain an understanding of the reason for making the payment to the customer and the rights and obligations in the related contracts. Reporting entities should also appropriately disclose their related judgments, if material.
To determine the accounting for the excess payment amount, including timing of recognition in income and presentation in the income statement, management should assess whether the payment also relates to other current or past contracts. If the reporting entity has recognized revenue from the same customer related to other contracts, the excess payment might represent a modification to the transaction price of those contracts. Refer to Revenue TRG Memo No. 37 and the related meeting minutes in Revenue TRG Memo No. 44 for further discussion of this topic.
Management should also assess whether the payment relates to anticipated future contracts. For example, reporting entities sometimes make advance payments to customers to reimburse them for costs to change vendors and/or to secure exclusivity in anticipation of future purchases even though the reporting entity may not have an enforceable right to them. Payments to a customer that relate to anticipated contracts could meet the definition of an asset. Payments capitalized would be amortized as a reduction to future revenues from that customer. Assets should be assessed for recoverability, which would generally be based on expected future revenues from the customer. Refer to US Revenue TRG Memo No. 59 and the related meeting minutes in Revenue TRG Memo No. 60 for further discussion of this topic.
If the payment does not relate to any other contracts (including past contracts or anticipated future contracts) with the customer, management should consider the substance of the payment to determine the appropriate presentation of the amount in excess of the transaction price. For example, management might conclude the excess payment should be presented as an expense because the arrangement no longer represents a contract with a customer when the transaction price is negative. In other cases, presenting the payment as negative revenue might be appropriate.
Example RR 4-31 illustrates the accounting when payments to a customer exceed the transaction price.
EXAMPLE RR 4-31
Consideration payable to customers — payment exceeds transaction price
ToyCo sells 1,000 products to Retailer for total consideration of $100,000. ToyCo is an emerging business and therefore, to receive desirable placement in Retailer’s store, ToyCo pays Retailer a one-time payment of $150,000. This payment is not in exchange for a distinct good or service and ToyCo does not have any other past or current contracts with the Retailer at the time of payment. Although ToyCo aspires to sell additional products to Retailer in the future, ToyCo does not currently anticipate specific future contracts with Retailer.
How should ToyCo account for the payment to Retailer?
Analysis
ToyCo should account for the payment as a reduction of the transaction price of the contract with Retailer because it does not receive a distinct good or service in exchange for the payment. ToyCo has determined that the excess amount of $50,000 ($100,000 contract price less $150,000 payment) does not relate to any other contracts with Retailer; therefore, the excess amount should be presented based on the substance of the payment. In this fact pattern, ToyCo would likely conclude that the $50,000 excess payment should be presented as an expense.
4.6.5 Settlement payments made to customers
Reporting entities may be required to make payments to customers to settle litigation claims or other disputes. Payments to a customer will generally be presented as a reduction of revenue because the reporting entity does not receive a distinct good or service in exchange for the payment. A settlement payment would only be presented as an expense if the claim or dispute was not related to the reporting entity's performance under the revenue contract. In some cases, it may not be clear whether the payment relates to past or future transactions. Cash payments made to customers to settle disputes often represent adjustments to the transaction price of a completed contract because they relate to disputes regarding performance or pricing. In other words, the reporting entity agrees as part of the settlement to make a price concession related to the past transaction. In these situations, the payments should be recorded as an immediate adjustment to revenue.
In other situations, a cash payment may represent an incentive for the customer to enter into a new contract. For example, a reporting entity may settle a class action lawsuit by issuing coupons to a large group of customers that can be used in connection with future purchases. It may be appropriate to account for these coupons when the future purchases are made if the coupons are viewed as incentives to enter into new contracts as opposed to adjustments to the transaction price for prior purchases. This assessment may require significant judgment.
Cash payments that relate to a contract in process should generally be accounted for as a modification to the contract. Refer to RR 2.9 for guidance on accounting for modifications.
4.6.6 Equity payments to customers
Consideration payable to a customer could be in the form of an equity instrument (for example, shares, share options, or other equity instruments). The income statement classification of consideration payable in the form of an equity instrument depends on whether the payment is in exchange for a distinct good or service, as discussed in RR 4.6.1. Payments to customers in the form of a reporting entity’s own equity instruments in exchange for a distinct good or service are accounted for in accordance with ASC 718, Compensation—stock compensation, similar to other share-based payments to nonemployees. Payments that are not in exchange for a distinct good or service, whether the payment is in the form of cash or an equity instrument, are a reduction of the arrangement’s transaction price.
Share-based payment awards issued to a customer should be measured and classified (that is, as equity or a liability) in accordance with ASC 718. As a result, for payments to customers in the form of an equity instrument that are a reduction of the transaction price, a reporting entity will apply ASC 718 to determine the amount and ASC 606 to determine the timing of the reduction of revenue. The equity instrument is measured at fair value on the grant date in accordance with ASC 718, which will also be the amount by which the transaction price is reduced. If the number of equity instruments is variable due to a performance condition that affects vesting, management will initially estimate the number of equity instruments to be issued in accordance with ASC 718. If the variability is due to a service condition that affects vesting, management will also estimate the number of instruments to be issued unless the reporting entity has a policy to only account for service-related forfeitures of nonemployee awards when they occur. Updates to these estimates are reflected in the transaction price based on the grant-date fair value of the equity instruments that ultimately vest. Changes in the measurement of an instrument after the grant date due to the form of the consideration (for example, remeasurement of a liability-classified instrument to fair value each period) are not an adjustment of the transaction price. See further discussion in SC 7.1.6 and SC 7.1.7.
4.6.7 Payments to third parties on behalf of a customer
A payment to a third party that is made on behalf of a reporting entity’s customer should be evaluated the same as a payment made directly to the customer. That is, the payment is a reduction of the transaction price of the revenue contract with the customer unless the payment is in exchange for a distinct good or service (refer to RR 4.6.1).
Determining whether a payment is made to a third party on behalf of a customer may require judgment. Considerations include whether the payment is for the benefit of the customer and whether there is a promise to the customer to make the payment, which could be explicit (stated in the contract with the customer or separately communicated to the customer) or implied based on the reporting entity’s customary business practices, published policies, or specific statements (see RR 3.2.2).
Example RR 4-32 illustrates the accounting for payments to third parties on behalf of a customer.
EXAMPLE RR 4-32
Payment to a third party on behalf of a customer – interest rate buydown
Payment to a third party on behalf of a customer – interest rate buydown
RetailerCo sells major household appliances to customers. Customers can pay RetailerCo directly for the appliances or they can apply to obtain financing for the appliances from FinanceCo, a third-party company that has a referral relationship with RetailerCo. Aside from the referral of customers by RetailerCo to FinanceCo, RetailerCo is not involved in FinanceCo’s underwriting process or decision about whether to extend financing to customers. If FinanceCo extends financing to a customer, upon delivery of the appliances to the customer, FinanceCo remits the purchase price of the equipment to RetailerCo. Pursuant to the terms of the financing agreement between FinanceCo and customer, FinanceCo collects the purchase price from the customer over time. RetailerCo has no further involvement in the financing arrangement and is not at risk if the customer fails to pay FinanceCo.
As a special promotion, FinanceCo agrees to offer a reduced interest rate to RetailerCo’s customers (for example, “no interest for the first year” or “twelve months same as cash”). In exchange, FinanceCo applies a discount to the amount it remits to RetailerCo for the purchase price of the appliances. In other words, even though the terms of the financing agreement state that RetailerCo’s customer is receiving less expensive financing, in substance, RetailerCo has funded an interest rate buydown on the customer’s behalf, and FinanceCo will continue to earn a “market” rate of interest for the financing it provided to RetailerCo’s customer.
How should RetailerCo consider the interest rate buydown in determining the transaction price for its appliance sales?
Analysis
The payment to FinanceCo (in the form of the right to collect the undiscounted purchase price in exchange for the discounted amount provided to RetailerCo) provides RetailerCo’s customer the benefit of an effective interest rate that is lower than that which they would otherwise be able to obtain from FinanceCo under normal commercial terms. RetailerCo, however, does not receive a distinct good or service from FinanceCo or its customer in exchange for the payment. Therefore, the amount of the interest rate buydown (the discount) is a reduction of the transaction price of the appliance. That is, revenue from the sale of the appliance to the customer is the net amount received from FinanceCo.
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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