Accounting: The Language of Business - Vol. 2 (Intermediate: Part 121)

Everyone needs an accountant, or so the saying goes. But why would that be? Accounting’s history can be traced back thousands of years to the cradle of civilisation in Mesopotamia and is said to have developed alongside writing, counting and money. The early Egyptians and Babylonians created auditing systems, while the Romans collated detailed financial information.

Revenue Recognition (Part H)

by

Charles Lamson

Step 3: Determine the Transaction Price (continued from Part 120)

Recall from Exhibit 8.1 from Part 114 and reintroduced below, the five steps in revenue recognition. In this post, we continue our discussion of Step 3.

Also recall from Part 120 that the transaction price is the amount that an entity will ultimately recognize as revenue. Measuring the transaction price can be quite simple in some cases. For example, assume a customer shopping at a retail store selects and pays $100 cash for a new dress. The transaction price is $100. However, with complex transactions, determining the transaction price is involved. Sellers consider the effects of a number of different factors when determining the transaction price, including:

1. Variable consideration and constraining estimates of variable consideration

2. Any significant financing component in the contract

3. Noncash consideration

4. Consideration payable to a customer

In Part 120, we discussed any significant financing component in the contract. This post discusses noncash consideration and consideration payable to a customer.

Noncash Consideration

In some contracts, instead of paying cash for the good or service, customers compensate the seller with goods, services, or other noncash items, such as shares of stock in the customer's corporation. In this case, the transaction price should be measured at the fair value at contract inception of the noncash consideration received by the seller. If the seller cannot reasonably estimate the fair value of the noncash consideration received, then she should measure the transaction price at the standalone selling price of the goods or services promised to the customer. Example 8.11 demonstrates accounting for noncash consideration. 

Consideration Payable to a Customer

At times, our seller makes payments to a customer if the seller is providing incentives to entice the buyer to purchase, or continue to purchase, its goods. Unless the payment to the customer is in exchange for a distinct good or service transferred to the seller, the seller should deduct the amount of the consideration payable to the customer from the transaction price. Example 8.12 demonstrates this accounting treatment.

Exhibit 8.4 summarizes determining the transaction price.

Click to enlarge.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED.,PP.385-387*

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