a fixed rate per unit of consumption. The contract has no minimum payment guarantees. Customer X is not
contractually obligated to use the equipment. However, Entity A is contractually obligated to transfer the
equipment to Customer X.
The conclusion in the TRG agenda paper was that the usage of the equipment by Customer X is a variable
quantity that affects the amount of consideration owed to Entity A. It does not affect Entity A’s performance
obligation, which is to transfer the piece of equipment. That is, Entity A has performed by transferring the
distinct good. Customer X’s actions, which result in payment to Entity A, occur after the equipment has been
transferred and do not require Entity A to provide additional goods or services.
5.6.1.D
When, if ever, to consider the goods or services underlying a customer
option as a separate performance obligation when there are no
contractual penalties
At their November 2015 meeting, TRG members generally agreed that, even if an entity
believes that it is virtually certain that a customer will exercise its option for additional
goods or services, it would not identify the additional goods or services underlying the
option as promised goods or services (or performance obligations) if there are no
contractual penalties. Only the option would be assessed to determine whether it
represents a material right to be accounted for as a performance obligation. As a result,
consideration that would be received in return for optional goods or services is not
included in the transaction price at contract inception.57
The TRG agenda paper included the following example of a contract in which it is
virtually certain that a customer will exercise its option for additional goods or services:
Example 28.31: Customer option with no contractual penalties58
An entity sells equipment and consumables, both of which are determined to be distinct goods that are
recognised at a point in time. The stand-alone selling price of the equipment and each consumable is €10,000
and €100, respectively. The equipment costs €8,000 and each consumable costs €60. The entity sells the
equipment for €6,000 (i.e. at a 40% discount on its stand-alone selling price) with a customer option to
purchase each consumable for €100 (i.e. equal to its stand-alone selling price). There are no contractual
minimums, but the entity estimates the customer will purchase 200 parts over the next two years. This is an
exclusive contract in which the customer cannot purchase the consumables from any other vendors during
the contract term.
TRG members generally agreed that the consumables underlying each option would not be considered part
of the contract. Furthermore, the option does not represent a material right because it is priced at the stand-
alone selling price for the consumable. This is the case even though the customer is compelled to exercise its
option for the consumables because the equipment cannot function without the consumables and the contract
includes an exclusivity clause that requires the customer to acquire the consumables only from the entity.
Accordingly, the transaction price is €6,000 and it is entirely attributable to the equipment. This would result
in a loss for the entity of €2,000 when it transfers control of the equipment to the customer.
However, contractual minimums may represent fixed consideration in a contract, even
if the contract also contains optional purchases. For example, an MSA may set minimum
purchase quantities that the entity is obliged to provide, but any quantities above the
minimum may require the customer to make a separate purchasing decision
(i.e. exercise a customer option). If contractual penalties exist (e.g. termination fees,
monetary penalties assessed for not meeting contractual minimums), it may be
appropriate to include some or all of the goods or services underlying customer options
Revenue
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as part of the contract at inception. This is because the penalty effectively creates a
minimum purchase obligation for the goods or services that would be purchased if the
penalty were enforced.
Example 28.32: Customer option with contractual penalties59
Consider the same facts as in Example 28.31 above, except that the customer will incur a penalty if it does
not purchase at least 200 consumables. That is, the customer will be required to repay some or all of the
£4,000 discount provided on the equipment. Per the contract terms, the penalty decreases as each consumable
is purchased at a rate of £20 per consumable.
The conclusion in the TRG agenda paper was that the penalty is substantive and it effectively creates
a minimum purchase obligation. As a result, the entity concludes that the minimum number of consumables
required to avoid the penalty would be evidence of enforceable rights and obligations. The entity would then
calculate the transaction price as £26,000 [(200 consumables × £100/consumable) + £6,000 (the selling price
of the equipment)]. Furthermore, the conclusion in the TRG agenda paper was that, if the customer failed to
purchase 200 consumables, the entity accounts for the resulting penalty as a contract modification.
5.6.1.E
Volume rebates and/or discounts on goods or services: customer options
versus variable consideration
Should volume rebates and/or discounts on goods or services be accounted for as
variable consideration or as customer options to acquire additional goods or services at
a discount? It depends on whether rebate or discount programme is applied
retrospectively or prospectively.
Generally, if a volume rebate or discount is applied prospectively, we believe the rebate
or discount would be accounted for as a customer option (not variable consideration).
This is because the consideration for the goods or services in the present contract is not
contingent upon or affected by any future purchases. Rather, the discounts available
from the rebate programme affect the price of future purchases. Entities need to
evaluate whether the volume rebate or discount provides the customer with an option
to purchase goods or services in the future at a discount that represents a material right
(and is, therefore, accounted for as a performance obligation) (see 5.6.1.E below).
However, we believe a volume rebate or discount that is applied retrospectively is
accounted for as variable consideration (see 6.2 below). This is because the final price
of each good or service sold depends upon the customer’s total purchases that are
subject to the rebate programme. That is, the consideration is contingent upon the
occurrence or non-occurrence of future events. This view is consistent with
Example 24 in the standard (which is included as Example 28.36 at 6.2.1 below).
Entities should keep in mind that they need to evaluate whether contract terms, other
than those specific to the rebate or discount programme, create variable consideration
that needs to be separately evaluated (e.g. if the goods subject to the rebate programme
are also sold with a right of return).
5.6.1.F
Considering the class of customer when evaluating whether a customer
option is a material right
At its meeting in April 2016, the FASB TRG discussed the issue how an entity should
consider the cl
ass of customer when evaluating whether a customer option is a material
right. FASB TRG members expressed diverse views on how an entity should consider
‘class of customer’ when determining whether a customer option to acquire additional
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goods or services represents a material right. However, they generally agreed that in
making this evaluation, an entity should first determine whether the customer option
exists independently of the existing contract. That is, would the entity offer the same
pricing to a similar customer independent of a prior contract with the entity? If the pricing
is independent, the option is considered a marketing offer and there is no material right.
FASB TRG members also generally agreed that the determination is likely to require an
entity to exercise significant judgement and consider all facts and circumstances.
As discussed above, paragraph B40 of IFRS 15 states that when an entity grants a customer
the option to acquire additional goods or services, that option is a separate performance
obligation if it provides a material right that the customer would not receive without
entering into the contract (e.g. a discount that exceeds the range of discounts typically
given for those goods or services to that class of customer in that region or market).
[IFRS 15.B40]. Furthermore, paragraph B41 of IFRS 15 states that an option to purchase
additional goods or services at their stand-alone selling prices does not provide a material
right and instead is a marketing offer. [IFRS 15.B41]. The FASB staff noted in the TRG agenda
paper that these requirements are intended to make clear that a customer option to
acquire additional goods or services would not give rise to a material right if a customer
could execute a separate contract to obtain the goods or services at the same price. That
is, customer options that would exist independently of an existing contract with a
customer do not constitute performance obligations in that existing contract.
The TRG agenda paper provided several examples of the FASB staff’s views on this
topic, including the following:
Example 28.33: Class of customer evaluation
Retailer owns and operates several electronic stores and currently provides customers who purchase a 50-
inch television with a coupon for 50% off the purchase of a stereo system. The coupon must be redeemed at
one of Retailer’s stores and is valid for one year. Retailer has never offered a discount of this magnitude to a
customer that does not purchase a television (or another item of similar value).
Customer A purchases a 50-inch television from Retailer. At the time of purchase, Customer A receives a coupon
for 50% off a stereo system. In evaluating whether the 50% discount provided to Customer A exists independently
of its existing contract to purchase a television, Retailer needs to compare the discount offered to Customer A
(50%) with the discount typically offered to other customers independent of a prior contract (purchase) with
Retailer. For customers that do not purchase a 50-inch television, the only promotion Retailer is running on the
stereo system is offering a 5% off coupon to all customers walking into the store. It would not be appropriate for
Retailer to compare the discount offered to Customer A with a discount offered to another customer that also
purchased a 50-inch television. This is because the objective of the requirements in paragraphs B40 through B41
is to determine whether a customer option exists independently of an existing contract with a customer.
Retailer determines that the discount offered to Customer A is not comparable to the discount typically
offered to customers without a prior contract (purchase). Rather, Customer A is receiving an incremental
discount that it would not have received had it not entered into a contract to purchase a 50-inch television.
The incremental discount provided to Customer A represents a material right.
Revenue
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5.6.1.G Considering
whether
prospective
volume discounts determined to be
customer options are material rights
At the April 2016 FASB TRG meeting, the FASB TRG members were asked to consider
how an entity should consider whether prospective volume discounts determined to be
customer options are material rights.60
The FASB TRG members generally agreed that in making this evaluation, similar to the
discussion in 5.6.1.F above, an entity would first evaluate whether the option exists
independently of the existing contract. That is, would the entity offer the same pricing
to a similar high-volume customer independent of a prior contract with the entity? If
yes, it indicates that the volume discount is not a material right, as it is not incremental
to the discount typically offered to a similar high-volume customer. If the entity
typically charges a higher price to a similar customer, it may indicate that the volume
discount is a material right as the discount is incremental.
The TRG agenda paper included the following example:
Example 28.34: Volume discounts
Entity enters into a long-term master supply arrangement with Customer A to provide an unspecified volume
of non-customised parts. The price of the parts in subsequent years is dependent upon Customer A’s
purchases in the current year. That is, Entity charges Customer A $1.00 per part in year one and if Customer A
purchases more than 100,000 parts, the year two price will be $0.90 per part.
When determining whether the contract between Entity and Customer A includes a material right, Entity first
evaluates whether the option provided to Customer A exists independently of the existing contract. To do
this, Entity compares the discount offered to Customer A with the discount typically offered to a similar high-
volume customer that receives a discount independent of a prior contract with Entity. Such a similar customer
could be Customer B who places a single order with Entity for 105,000 parts. Comparing the price offered to
Customer A in year two with offers to other customers that also receive pricing that is contingent on prior
purchases would not help Entity determine whether Customer A would have been offered the year two price
had it not entered into the original contract.
The evaluation of when volume rebates result in a material right is likely to require
significant judgement.
5.6.1.H
Accounting for the exercise of a material right
At the March 2015 TRG meeting, the TRG members were asked to consider how an
entity would account for the exercise of an option for additional goods or services that
provides the customer with a material right (a material right).61
The TRG members generally agreed that it is reasonable for an entity to account for
the exercise of a material right as either a contract modification or as a continuation
of the existing contract (i.e. a change in the transaction price). TRG members also
generally agreed that it is not appropriate to account for the exercise of a material
right as variable consideration.
2092 Chapter 28
Although the TRG members generally agreed that the standard could be interpreted to
allow either approach, many TRG members favoured treating the exercise of a material
right as a continuation of the existing contract because th
e customer decided to
purchase additional goods or services that were contemplated in the original contract
(and not as part of a separate, subsequent negotiation). Under this approach, if a
customer exercises a material right, an entity would update the transaction price of the
contract to include any consideration to which the entity expects to be entitled as a
result of the exercise, in accordance with the requirements for changes in the
transaction price included in paragraphs 87-90 of IFRS 15 (see 7.5 below).
Under these requirements, changes in the total transaction price are generally
allocated to the separate performance obligations on the same basis as the
initial allocation. However, paragraph 89 of IFRS 15 requires an entity to allocate a
change in the transaction price entirely to one or more, but not all, performance
obligations if the criteria in paragraph 85 of IFRS 15 are met. [IFRS 15.89]. These
criteria (discussed further at 7.3 below) are that the additional consideration
specifically relates to the entity’s efforts to satisfy the performance obligation(s)
and that allocating the additional consideration entirely to one or more, but not all,
performance obligation(s) is consistent with the standard’s allocation objective
(see 7 below). The additional consideration received for the exercise of the option
is likely to meet the criteria to be allocated directly to the performance obligation(s)
underlying the material right. Revenue would be recognised when (or as) the
performance obligation(s) is satisfied. [IFRS 15.85].
The TRG agenda paper included the following example.
Example 28.35: Exercise of a material right under the requirements for changes in
the transaction price62
Entity enters into a contract with Customer to provide two years of Service A for $100 and includes an option
for Customer to purchase two years of Service B for $300. The stand-alone selling prices of Services A and
B are $100 and $400, respectively. Entity concludes that the option represents a material right and its estimate
of the stand-alone selling price of the option is $33. Entity allocates the $100 transaction price to each
performance obligation as follows:
Stand-alone
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 414
