Components of the transaction price

  • Fixed consideration
  • Variable consideration
  • Significant nancing component
  • Noncash consideration
  • Consideration payable to a customer
  • Exclude sales taxes collected on behalf of others
ASC 606-10-32-3 The nature, timing, and amount of consideration promised by a customer affect the estimate of the transaction price. When determining the transaction price, an entity shall consider the effects of all of the following:
  1. Variable consideration (see paragraphs 606-10-32-5 through 32-10 and 606-10-32-14)
  2. Constraining estimates of variable consideration (see paragraphs 606-10-32-11 through 32-13)
  3. The existence of a signi cant financing component in the contract (see paragraphs 606-10-32-15 through 32-20)
  4. Non-cash consideration (see paragraphs 606-10-32-21 through 32-24)
  5. Consideration payable to a customer (see paragraphs 606-10-32-25 through 32-27).

ASC 606-10-32-4 For the purpose of determining the transaction price, an entity shall assume that the goods or services will be transferred to the customer as promised in accordance with the existing contract and that the contract will not be cancelled, renewed, or modifed.

 

Paragraph BC185 of ASU 2014-09 states that the FASB and IASB de ned “transaction price” in such a manner as to require an entity, at the end of each reporting period, “to predict the total amount of consideration to which the entity will be entitled from the contract” with the customer. In meeting this objective, an entity should evaluate those elements that affect the nature, timing, and uncertainty of cash flows related to its revenues and reflect such elements in its measurement of revenue.
 
In paragraph BC188 of ASU 2014-09, the boards acknowledge that determining the transaction price in a contract that contains only fixed or known cash flows will be simple. However, because of the nature of certain pricing features and cash flow structures, determining the amount to which an entity will be entitled will be inherently complex in many contracts. In light of this, the boards also acknowledge that determining the transaction price in step 3 will be more difficult when contracts with customers contain:
  • Consideration that is variable until the resolution of future uncertainties (i.e., variable consideration).
  • Financing components that are signifcant to the contract’s overall cash flow stream and pricing (i.e., significant financing components).
  • Consideration in a form other than cash (i.e., noncash consideration).
  • Consideration that is payable by the entity to its customer (i.e., consideration payable to a customer).
Further, paragraph BC187 of ASU 2014-09 notes that it may be more difficult to determine the transaction price when amounts to which an entity is entitled are sourced from parties other than a customer (e.g., a manufacturer’s payments to a retailer as a result of a customer’s use of a manufacturer’s coupon at the retailer’s store). The boards clarified that such amounts are included in an entity’s determination of the transaction price.
Excerpt from Deloitte's Revenue Recognition Guide, found here.