A retailer pays a cooperative-advertising credit to a customer that operates independent stores selling the retailer's products. The credit is not payment for any distinct good or service the customer provides to the retailer, and the retailer cannot reasonably estimate the fair value of any benefit received from the customer in exchange. Under ASC 606-10-32-25, how should the retailer account for this payment?
- As a marketing expense entirely unrelated to revenue, with no effect on the transaction price
- As an increase to the transaction price, since paying the customer strengthens the ongoing sales relationship
- As a reduction of the transaction price for revenue recognized from that customer
- Only as a reduction of transaction price if the payment is made in cash rather than as a credit against amounts owed
Why C? And why not the others?
Correct answer: C. As a reduction of the transaction price for revenue recognized from that customer
ASC 606-10-32-25 requires consideration payable to a customer to be accounted for as a reduction of the transaction price unless the payment is in exchange for a distinct good or service that the customer transfers to the entity, and if the entity cannot reasonably estimate the fair value of a distinct good or service received, the entire payment is treated as a reduction of transaction price. Since the credit here is not payment for a distinct good or service and its fair value cannot reasonably be estimated even if some benefit existed, the full amount reduces the transaction price for revenue recognized from that customer. Treating the payment purely as an unrelated marketing expense with no revenue effect ignores that ASC 606 specifically directs entities to net this kind of payment against revenue rather than record it as a separate operating expense. Increasing the transaction price runs in the opposite direction from what the standard requires — a payment made to the customer reduces, never increases, the amount of consideration the entity is entitled to recognize as revenue. The form of payment, whether cash or a credit against amounts owed, does not change the accounting; ASC 606-10-32-25 applies to consideration payable to a customer regardless of whether it is settled in cash, credit, coupons, or another form.
Source: FASB Accounting Standards Codification: ASC 606-10-32-25, Revenue from Contracts with Customers — Consideration Payable to a Customer