Diversity in Thought Evaluating the existence of and the accounting for a material right requires judgment based on facts and circumstances unique to each entity. Several differing viewpoints have formed since the issuance of ASC Issue 2: When determining if a material right exists, should each transaction be considered individually, or should all transactions with a customer be considered?
Issue 3: Is the evaluation of whether a material right exists purely quantitative, or are there qualitative factors that should be considered?
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Issue 1: Accounting for the exercise of a material right View A The exercise of a material right should be accounted for as a continuation of the current contract because the current contract anticipates the additional goods or services to be provided as part of the exercise of the material right.
That is, at the time of the exercise, an entity should update the transaction price of the current contract to include the additional consideration customer option to be received.
The additional consideration should be allocated to the performance obligation underlying the material right, and revenue should be recognized as that performance obligation is fulfilled.
Using the example above, Customer C purchases Product Z 15 days later. Using the example above, the contract is deemed to be modified when Customer C purchases Product Z using the voucher. This treatment is the same as View A. View C The exercise of the material right should be accounted for as a variable consideration.
Customer’s Option Sample Clauses
The TRG concluded that View C was not supported by the revenue standard, but Views A and B are supported and should be applied according to the facts and circumstances of the transaction. Whichever view is applied, that accounting treatment should be consistently applied across all similar transactions. Issue 2: Breadth of transactions to consider when determining if a material right exists. View A Each transaction should be evaluated individually. Supporters of this viewpoint citewhich states that the evaluation of whether an option provides a material right should customer option based only on the customer option and circumstances of the current transaction.
This method requires less evaluation as only the facts in the customer option transaction are used in the evaluation and no external circumstances are considered. To illustrate this view, consider Airline A, which offers its customers one mile for every dollar spent.
Points may be exchanged for free future flights when the customer has earned sufficient points. View B All transactions with a customer should be considered. By doing so, the vendor can make a more relevant comparison between the discount in the current transaction and discounts in other transactions, which is an essential part of determining if the option provides a material right.
To understand this view, consider the same scenario described above in View A. Under View B, Airline A would consider whether the miles earned contribute to a material right that the customer has or will eventually accumulate. In other words, the entity would consider all miles earned by a customer when deciding if there is a material right. View B is superior in evaluating if a single contract creates a material right. This is particularly relevant for companies with point-type loyalty programs—such as the airline in the above customer option its customers can accumulate incentives for future use.
This viewpoint fails to consider two things: When a loyalty program allows customers to use the customer option accumulated over multiple transactions, then it is possible that a material right exists as a result of multiple transactions.
Considering customer option single purchase of airfare in isolation would not represent the economics of the customer relationship as the customer would have a material right customer option sufficient miles had been accumulated to trade in for a free flight.
When an option with some form of discount is offered, the vendor is likely trying to incentivize the customer to make a future purchase. In other words, the vendor is trying to create repeat business through incentives. Consequently, it makes sense to consider the entire relationship to better capture the intent of the discount and more accurately evaluate for a material right.
View B makes sense for most transactions. However, an argument can be made for a company to adopt View A, considering each contract independent of the other contracts. This view would make sense if any of the following circumstances existed: Options are always priced at the relative selling price. Per ASCany option priced at the relative selling price is not considered a material right, even if the future purchase can only be customer option after entering into a prior contract ASC In this case, other contracts are irrelevant and need not be considered.
Options never provide a discount greater than the range of discounts typically given to customers for other reasons. A material right only exists if the option offers a discount greater than the customer option discount. For the same reason as the point above, no material right exists regardless of an existing customer relationship so there is no need to consider other contracts.
Options do not influence customer buying habits.
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Customer option a vendor has historical information showing that options do not significantly affect whether or not a customer made future purchases, then View A would be viable. Most TRG members agreed that the evaluation should consider all relevant transactions with a customer, including past, present, and future transactions.
View A Evaluation for a material right should only be quantitative. The use of only quantitative analysis is based on the current general application of US GAAP, which requires an entity to evaluate if a discount is incremental to the discounts given in comparable transactions.
Change to Margin Parameter for Customer Option Value Aggregation - CME Group
To illustrate, the TRG provided the example of a retailer that offers any customer who makes a purchase on a certain day a 25 percent coupon for a future purchase.
The retailer determines that customers typically use the coupon to purchase a product that is more expensive than what they would typically purchase. Under View A, the retailer would compare the standalone value of the coupon for each individual customer.
If the discount is comparable to other discounts the retailer offers, then no material right exists.
However, if 25 percent is higher than the standard discount, then the incremental discount could be a material right if it is significant. View B Evaluation for a material right has both quantitative and qualitative elements. Proponents of this view propose that considering qualitative factors, like customer expectations, is an essential part of evaluating for a material right.
Applying View B to the same scenario described above, the retailer would still consider if the discount is more than the standard discount offered to its customers.
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The retailer would also consider qualitative factors, such as how the discount may affect customer buying behavior. This view may be most applicable when an entity reliable and fast earnings to a customer a discount that may be above normal promotional discounts, but not by a significant amount.
Accounting for the exercise of a customer option
For example, an entity may offer a The entity may decide that the incremental discount 2. If the customer is buying planes, the dollar impact of the 2.
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Additionally, the vendor may be trying to influence buying behavior by requiring the customer to purchase a certain amount customer option products. View B is more appropriate when evaluating for material rights.
The TRG also noted that the standard was not designed to create a bright line percentage of the total transaction an option needs to be to qualify as material.
There are two supportable approaches to account for the exercise of an option: Account for the exercise of the option as a contract modification. Refer to RR 2.
Thus, each entity must determine what incremental discount qualifies as significant. The TRG concluded that both qualitative and quantitative factors should be considered, including whether the right accumulates over time.
Comparison to No authoritative guidance exists on accounting for customer options to buy future deliverables. Under current codified guidance, an option to buy future products at a discounted price is accounted for as a separate deliverable if it is significant and incremental in two aspects: The range of discounts accounted for in the pricing of other elements in the contracts; AND The range of discounts typically given in comparable transactions If the discount is considered significant and incremental, then a portion of the revenue from the original transaction is deferred and recognized when the products are delivered.
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The deferred revenue is calculated by dividing the estimated discount in dollars by the sum of the current transaction price and the estimated price of the future product. This percentage is then multiplied by the current transaction consideration and the result is the amount of revenue to be deferred. ASC does not use the estimated price of the future product see description aboveresulting in a greater percentage of the transaction revenue being customer option.
While the existing standard applies only to software products, all entities will defer more revenue from customer options for additional goods and services as a result customer option the updated standard. Conclusion Although it was identified as a subject for potential debate, this section of the new standard is relatively straightforward.
When evaluating customer contracts for options that provide a material right, an entity must first decide if it will consider each transaction customer option or the entire customer relationship. Then the entity needs to consider quantitative and qualitative analysis on the current transaction and compare it to similar transactions to determine if the option provides a material right.
The entities that will be most affected by the updated standard are those that have loyalty programs, such as the retail, consumer, and airline industries; especially when they have a high volume of transactions with their customers.
If so, then a portion of every transaction will be allocated to the rewards as it constitutes a separate performance obligation.