ASC 606 Revenue Recognition: Identifying the Transaction Price

Author: Lynn Fountain

Determining transaction price is more difficult than it may first appear. Transaction price is the basis for measuring revenue. It is the amount of consideration the entity expects to be entitled to in exchange for transferring promised goods or services. Determining transaction price requires election of policies and significant use of judgment. Completing this step for fixed price contracts can be straightforward. However, the path becomes convoluted for variable priced contracts. The new revenue recognition standard identifies three areas that affect the estimate of transaction price, which we will review: • Nature of consideration • Timing of consideration • Amount of consideration In addition, there are many variables that must be considered and evaluated when determining transaction price. This segment will review these variables with applied examples. Within this segment we will detail out considerations that must be taken into account to determine the transactions price. This includes understanding the concept of constraints, variability in transaction price, rights of return, dealing with significant financing components, understanding consideration payable to the customer and evaluating sales based or usage based royalties. To illustrate the concepts we will use multiple scenario analysis. In addition, we will discuss the impact of COVID-19 on concepts imbedded in determining the transaction price.

Publication Date: November 2021

Designed For
Accountants and Finance professionals, Internal auditors/Professionals considering the role of internal audit, and Legal and Compliance professionals.

Topics Covered

• Determine The Transaction Price
• Consideration in Determining TP
• Constrained Example
• Implied Variability
• Implied Example
• Example VC Constrained
• Rights of Return
• Significant Financing Component
• Consideration Payable to the Customer
• Sales Based or Usage Based Royalties
• COVID Implications on Transaction Price

Learning Objectives

• Recognize and apply concepts and considerations that contribute to the transaction price
• Recognize and apply the concept and methods to determine of variable consideration
• Recognize and apply the concept of variability constraints
• Identify what constitutes implied variability
• Recognize how rights of return impact transaction price
• Recognize how provisions that include a significant financing component impact transaction price
• Recognize examples of significant financing components
• Recognize how sales based or usage royalties impact transaction price
• Recognize examples related to the various components of transaction price
• Identify the first step in the revenue recognition model
• Describe how transaction price applies
• Identify a fee charged by retailers to providers to have product placed on their shelves

Level
Basic

Instructional Method
Self-Study

NASBA Field of Study
Accounting (2 hours)

Program Prerequisites
None

Advance Preparation
None