A customer signs a contract to purchase equipment and, under the payment terms, will pay the full price 18 months after the equipment is delivered, with no other stated purpose for the delay. In assessing whether this arrangement contains a significant financing component that requires adjusting the transaction price, which factors does ASC 606-10-32-17 direct the entity to consider?
- Only whether the customer is a new customer or a long-standing repeat customer of the entity
- Only whether the equipment being sold is classified as a current or a long-term asset on the entity's own balance sheet
- Only whether the contract was negotiated in writing rather than agreed to orally
- The difference, if any, between the amount of promised consideration and the cash selling price of the equipment, together with the combined effect of the expected length of time between transfer of the equipment and payment and the prevailing interest rates in the relevant market
Why D? And why not the others?
Correct answer: D. The difference, if any, between the amount of promised consideration and the cash selling price of the equipment, together with the combined effect of the expected length of time between transfer of the equipment and payment and the prevailing interest rates in the relevant market
ASC 606-10-32-17 directs an entity assessing whether a significant financing component exists to consider factors including the difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services, and the combined effect of the expected length of time between when the entity transfers the goods or services and when the customer pays, together with the prevailing interest rates in the relevant market; with an 18-month payment gap and no other stated purpose for the delay, both of those factors point toward evaluating a financing component. Whether the customer is new or long-standing is a relationship fact that the standard does not list as a factor in this assessment; financing significance turns on pricing and timing economics, not customer tenure. Whether the entity classifies the underlying equipment as a current or long-term asset on its own books is a balance-sheet presentation question for the seller's asset, unrelated to the separate question of whether the timing of the customer's payment embeds a financing arrangement. Whether the contract is written or oral affects contract identification under ASC 606-10-25-2 but has no bearing on the economic financing-component analysis, which looks at price and timing gaps rather than the form of the agreement.
Source: FASB Accounting Standards Codification: ASC 606-10-32-17, Revenue from Contracts with Customers — Existence of a Significant Financing Component