A vendor regularly sells Product A, Product B, and Product C separately, with observable standalone selling prices of $50, $30, and $20 respectively. The vendor also regularly sells Product A and Product B together as a bundle for $64, an observable $16 discount from their combined $80 standalone price, and it never discounts Product C. In a new contract, the vendor sells all three products together for $84, a $16 total discount that matches the historical A-and-B bundle discount exactly, with Product C priced at its full $20 standalone price. Under ASC 606-10-32-37, how should the vendor allocate the $16 discount?
- Proportionally across all three performance obligations, Product A, Product B, and Product C, based on their relative standalone selling prices
- Entirely to Product A and Product B, because the vendor regularly sells them separately, regularly sells them together at an observably discounted bundle price, and the evidence in this contract shows the entire discount relates to the A-and-B bundle rather than to Product C
- Entirely to Product C, because it is the lowest-priced performance obligation and therefore absorbs any residual discount in the contract
- The vendor may not allocate any discount at all in a contract that includes three or more performance obligations
Why B? And why not the others?
Correct answer: B. Entirely to Product A and Product B, because the vendor regularly sells them separately, regularly sells them together at an observably discounted bundle price, and the evidence in this contract shows the entire discount relates to the A-and-B bundle rather than to Product C
ASC 606-10-32-37 permits departing from the default proportional allocation of a discount when three criteria are met: the entity regularly sells each distinct good or service in the bundle separately, it also regularly sells a bundle of some of those goods or services at a discount to the sum of their standalone selling prices, and the discount attributable to that specific bundle is substantially the same as the discount in the current contract, giving observable evidence about which performance obligations the entire discount relates to. All three criteria are met here: A and B are each sold separately, A and B are regularly bundled at an observable $16 discount, and this contract's $16 discount with C priced at its full standalone amount is substantially the same evidence, so the entire discount is allocated to A and B rather than spread across all three. Proportionally allocating the discount across all three products, including C, ignores the specific observable evidence that the discount relates only to the A-and-B bundle and would incorrectly reduce the amount allocated to Product C below its standalone selling price. Allocating the entire discount to Product C simply because it carries the lowest price has no basis in the guidance, which ties allocation to observable evidence about which goods or services the discount actually relates to, not to which one happens to be cheapest. There is no rule under ASC 606 barring discount allocation once a contract has three or more performance obligations; the general proportional method and the narrower discount-allocation exception both apply regardless of how many performance obligations a contract contains.
Source: FASB Accounting Standards Codification: ASC 606-10-32-37, Revenue from Contracts with Customers — Allocating a Discount