likelihood that the customer would exercise the option. The standard also provides an alternative to estimating the standalone selling price of an option. This practical alternative applies when the goods or services are both (1) similar to the original goods and services in the contract (i.e., the entity continues to provide what it was already providing)10and (2) provided in accordance with the terms of the original contract. The standard indicates that this alternative generally applies to options for contract renewals (i.e., the renewal option approach). Under this alternative, a portion of the transaction price is allocated to the option (i.e., the material right that is a performance obligation) by reference to the total goods or services expected to be provided to the customer (including expected renewals) and the corresponding expected consideration. Retailers can grant multiple types of options to customers. We believe the form of an option should not affect how the standalone selling price is estimated. Consider, for example, a retailer that gives customers who spend more than $100 during a specified period a $15 discount on a future purchase in the form of a coupon or a gift card that expires two weeks from the sale date. If the retailer determines that this type of offer represents a material right, it will need to allocate a portion of the transaction price to the option on a relative standalone selling price basis. The standard requires that an entity first look to any directly observable standalone selling price, which requires the entity to consider the nature of the underlying transaction. In this example, while a customer can purchase a $15 gift card for face value, that transaction is not the same in substance as a transaction in which the customer is given a $15 gift card or coupon in connection with purchasing another good or service. As such, we believe a retailer may determine that there is no directly observable standalone selling price for a “free” gift card or coupon obtained in connection with the purchase of another good or service. The estimated standalone selling price for an option given in the form of a gift card or a coupon would be the same because both estimates would reflect the likelihood that the option will be exercised. How we see it Entities that provide material rights to customers need processes and systems to track these customer options, estimate the standalone selling price of the options and allocate the transaction price to the current purchases and option based on that estimate. This has required entities to change their processes and internal controls.
EY AccountingLink | ey.com/us/accountinglink6 | Technical LineHow the new revenue standard affects retail and consumer products entities Consideration paid or payable to a customer Many wholesale and consumer products entities make payments to their customers. The standard states that an entity should account for the consideration payable to a customer, regardless of whether the purchaser receiving the consideration is a direct or indirect customer of the entity. Consideration payable to a customer includes amounts payable to any
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