A supplier pays a retailer a fee to display end-cap promotional signage for the supplier's products in the retailer's stores. The signage service is distinct from the products the retailer buys from the supplier, and the supplier can reasonably estimate the fair value of that signage placement service based on prices it has separately paid other retailers for comparable placements. The fee the supplier pays for this specific placement is $2,000 higher than that reasonably estimated fair value. Under ASC 606-10-32-26, how should the supplier account for this $2,000 excess?
- The entire fee, with no adjustment, is recognized as advertising expense because the placement service has an estimable fair value
- The supplier accounts for the payment up to the estimated fair value as a purchase of a distinct service, similar to other purchases from suppliers, and accounts for the $2,000 excess over fair value as a reduction of the transaction price for the supplier's sales to that retailer
- The full payment, including the amount up to fair value, must be treated as a reduction of the transaction price because any consideration paid to a customer reduces revenue regardless of whether a distinct service was received
- The $2,000 excess is capitalized as a marketing intangible asset and amortized over the expected life of the retail relationship
Why B? And why not the others?
Correct answer: B. The supplier accounts for the payment up to the estimated fair value as a purchase of a distinct service, similar to other purchases from suppliers, and accounts for the $2,000 excess over fair value as a reduction of the transaction price for the supplier's sales to that retailer
ASC 606-10-32-26 provides that when consideration payable to a customer is for a distinct good or service and the entity can reasonably estimate that item's fair value, the entity accounts for the purchase in the same way it would account for other purchases from suppliers up to that estimated fair value, and if the consideration paid exceeds the estimated fair value of the distinct good or service received, the entity accounts for that excess as a reduction of the transaction price; here, the signage service is distinct and has an estimable fair value, so only the $2,000 excess above that fair value reduces the transaction price for the supplier's product sales, while the remainder is treated as an ordinary purchase of a service. Treating the entire fee as advertising expense with no reduction ignores that the standard specifically requires the excess-over-fair-value portion to reduce transaction price rather than sit entirely in an expense account. Reducing the transaction price by the full payment, including the fair-value portion, misapplies the rule reserved for situations where fair value cannot be reasonably estimated or where the payment is not for a distinct good or service at all; here fair value is estimable and a distinct service was received, so only the excess is treated that way. Capitalizing the excess as a marketing intangible asset has no basis in ASC 606-10-32-26, which directs the excess to reduce transaction price, not to be recognized as a separate asset.
Source: FASB Accounting Standards Codification: ASC 606-10-32-26, Revenue from Contracts with Customers — Consideration Payable to a Customer