A customer pays a vendor for consulting services partly by transferring shares of the customer's own equity instead of cash. Under ASC 606-10-32-21, how should the vendor measure this noncash consideration when determining the transaction price?
- At the par value stated on the equity instrument's certificate, regardless of its trading value
- At fair value, generally measured as of the date the noncash consideration is received or promised
- At the original cost the customer paid to issue the shares
- Noncash consideration is excluded from the transaction price and no revenue may be recognized until it is converted to cash
Why B? And why not the others?
Correct answer: B. At fair value, generally measured as of the date the noncash consideration is received or promised
ASC 606-10-32-21 requires that noncash consideration promised by a customer be measured at fair value in order to determine the transaction price, generally assessed as of the date the noncash consideration is received or, if earlier, the date the entity's right to it is promised. Fair value reflects what the equity instruments are actually worth in the market at the relevant date, so it captures the economic substance of what the vendor is receiving in exchange for its services. Using par value ignores that par value is a nominal, largely arbitrary figure set for legal purposes and routinely bears no relationship to what the shares are actually worth. Using the customer's original issuance cost is similarly unreliable, since shares can appreciate or decline substantially in value between issuance and the date they are transferred as consideration, and that history is not what the vendor is entitled to recognize as revenue. Noncash consideration is not excluded from the transaction price; ASC 606 explicitly contemplates and includes it, measured at fair value, rather than deferring all recognition until a hypothetical future cash conversion that the standard does not require.
Source: FASB Accounting Standards Codification: ASC 606-10-32-21, Revenue from Contracts with Customers — Noncash Consideration