Revenue Recognition Issue 5 – Determine the Transaction Price

In many contracts with customers, the transaction price is fairly obvious; however, oftentimes it is not and requires significant interpretation. For example:

• Are there variable pricing components under the contract (like rapid payment incentives, quantity purchase discounts, penalties for late payments, etc.)?
• Are there refund liabilities, where you agree to repay the customer if there are product defects or if you don’t achieve certain contract benchmarks?
• Are there financing components to the contract, where you provide extended payment terms to the customer and pricing might be impacted depending on when they pay?
• Is there non-cash consideration paid to you by the customer for your product (like a sales incentive marketing trip if they buy a certain amount of your product in a defined period of time)?

In each of these situations, and dozens more, you will need to interpret the terms of your customer contracts and use your professional judgment to determine what the customer’s transaction price really is, not necessarily based on what you invoice them today, but rather based on the overall contract fulfillment. As you can imagine, this will in many cases be very complicated and will require significant effort in understanding and documenting.

Stay tuned for additional alerts in our Revenue Recognition Readiness Check Series. Next in our series, we will explore Allocating the Transaction Price to the Performance Obligations.

Please contact your BMF Advisor for additional information regarding the new standards.