301847 Flashcards
Which of the following would represent an option with a material right offered to a customer?
A coupon offering 20% off the next purchase that is given to all customers
An offer to accept a returned product for a full refund that is offered to all customers
An online advertisement that highlights an upcoming holiday sale
A coupon offering 50% off of a customer’s next purchase if the customer spends over a specified amount, with customers not spending over that amount getting no such offer
A coupon offering 50% off of a customer’s next purchase if the customer spends over a specified amount, with customers not spending over that amount getting no such offer
Certain options that grant a material right to a customer are considered as separate performance obligations with a portion of the transaction price allocated to them and recognized when the option is exercised. If an option provides a material right to the customer that it would not have received without entering into the contract, it should be considered as a separate performance obligation. For example, offering a 50% discount on future purchases over and above one offered to all customers would be considered a material right. Offering a free item when a customer purchases other products would be another example of an option granting a material right.
A coupon offering 20% off the next purchase that is given to all customers, an offer to accept a returned product for a full refund that is offered to all customers, and an online advertisement that highlights an upcoming holiday sale are not examples of an option with a material right.
Performance Obligation
A performance obligation is a promise in a contract with a customer to transfer to the customer either:
- a good or service (or a bundle of goods or services) that is distinct, or
- a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
FASB ASC Glossary
Transaction Price
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
FASB ASC Glossary
2331.22
An option with a material right provides a material right to a customer which it would not have received without entering into the contract (i.e., incremental discount or free item). These types of options are treated as separate performance obligations, with a portion of the transaction price allocated to them, based on the standalone selling price; revenue is recognized when the option is exercised.
FASB ASC 606
