Members of the Transition Resource Group for Revenue Recognition TRG generally

Members of the transition resource group for revenue

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Members of the Transition Resource Group for Revenue Recognition (TRG) generally agreed 4 that entities should consider all relevant transactions with a customer (i.e., current, past and future transactions), including those that provide accumulating incentives such as loyalty programs, when determining whether an option represents a material right. That is, the evaluation should not be performed only in relation to the current transaction.
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EY AccountingLink | ey.com/us/accountinglink 3 | Technical Line How the new revenue standard affects retail and consumer products entities The following example summarizes Example 49 in the standard 5 and illustrates the accounting for an option that provides the customer with a material right. Illustration 1 — Coupon that provides the customer with a material right An entity enters into a contract for the sale of Product A for $100. As part of the contract, the entity gives the customer a 40% discount voucher for any future purchases up to $100 in the next 30 days. The entity intends to offer a 10% discount on all sales during the next 30 days as part of a seasonal promotion. The 10% discount cannot be used in addition to the 40% discount voucher. Because all customers will receive a 10% discount on purchases during the next 30 days, the only discount that provides the customer with a material right is the discount that is incremental to that 10% (that is, the additional 30% discount). The entity accounts for the promise to provide the incremental discount as a performance obligation in the contract for the sale of Product A. To estimate the standalone selling price of the discount voucher in accordance with ASC 606-10-55-44, the entity estimates an 80% likelihood that a customer will redeem the voucher and that a customer will, on average, purchase $50 of additional products. Consequently, the entity’s estimated standalone selling price of the discount voucher is $12 ($50 average purchase price of additional products × 30% incremental discount × 80% likelihood of exercising the option). The standalone selling prices of Product A and the discount voucher and the resulting allocation of the $100 transaction price are as follows: Performance obligation Standalone selling price Product A $ 100 Discount voucher $ 12 Total $ 112 The entity allocates $89 ($100 / $112 x $100) to Product A and recognizes revenue for Product A when control transfers. The entity allocates $11 ($12 / $112 x $100) to the discount voucher and recognizes revenue for the voucher when the customer redeems it for goods or services or when it expires. Loyalty or reward programs Retail and consumer products entities frequently offer loyalty or reward programs under which customers accumulate points that they can redeem for “free” or discounted products or services. Under the standard, an entity typically concludes that a loyalty or reward program provides a material right to customers that they would not receive without entering into a contract. A loyalty or reward program that provides a material right is identified as a performance obligation for purposes of revenue recognition.
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  • Fall '17
  • meenakshi

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