An entity signs two written agreements with the same customer within a few minutes of each other, negotiated as part of a single commercial discussion. The pricing in the second agreement is discounted specifically because the customer already signed the first, and both agreements are for related deliverables. Under ASC 606-10-25-9, how should the entity treat these two agreements?
- Combine and account for the two contracts as a single contract, because they were entered into at or near the same time with the same customer and the price in one contract depends on the price or performance of the other
- Always account for the two agreements separately, because ASC 606 requires each signed document to be its own unit of account
- Combine the contracts only if the customer explicitly requests combined accounting treatment in writing
- Treat the second, discounted agreement as a modification of the first only if more than one year has passed between signing dates
Why A? And why not the others?
Correct answer: A. Combine and account for the two contracts as a single contract, because they were entered into at or near the same time with the same customer and the price in one contract depends on the price or performance of the other
ASC 606-10-25-9 requires an entity to combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for them as a single contract if any one of several criteria is met, including that the contracts are negotiated as a package with a single commercial objective, the amount of consideration in one contract depends on the price or performance of the other, or the goods or services promised are a single performance obligation. Here the near-simultaneous signing, the interdependent discounted pricing, and the related deliverables together satisfy that test, so combination is required rather than optional. The idea that every signed document must always be its own unit of account ignores this explicit combination guidance and would let entities structure economically single deals as multiple contracts to manipulate the accounting outcome, which the standard is designed to prevent. Combination does not depend on the customer requesting it in writing; the assessment is based on the objective facts of how the contracts were negotiated and priced, not on either party's preference. There is likewise no one-year timing rule that converts a second, price-linked agreement into a modification of the first; the combination criteria turn on timing being at or near the same time and on substantive interdependence, not on a fixed calendar threshold.
Source: FASB Accounting Standards Codification: ASC 606-10-25-9, Revenue from Contracts with Customers — Contract Combinations