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OVERVIEW
Step three of the fi ve step process of this ASU is
"determine the transaction price." The transaction
price is the amount of consideration to which
an entity expects to be entitled in exchange for
transferring promised goods or services to a
customer. One eff ect of the transaction price that
must be considered or assessed is the existence of
a signifi cant fi nancing component.
The objective is for the entity to recognize revenue
based on a "cash selling price."
SIGNIFICANT FINANCING
COMPONENT
A signifi cant fi nancing component exists when the
timing of payments agreed to by the parties to the
contract (either explicitly or implicitly) provides the
customer or the entity with a signifi cant benefi t of
fi nancing the transfer of goods or services to the
customer.
What to do:
1. Apply the practical expedient.
2. Assess the signifi cance.
3. Determine the discount rate.
4. Adjust the transaction price.
STEP 1: APPLY THE PRACTICAL
EXPEDIENT
At inception of the contract, if the entity expects
to receive payment within one year or less of
when a good or service is transferred to the
customer, the transaction price does not have
to be adjusted for any signifi cant fi nancing
components. This judgment would be applied
to incremental costs as they are scheduled and
the anticipated timing to receive payment from
the customer for incurring the costs. The entity
should apply the practical expedient consistently
to similar contracts in similar circumstances.
If the practical expedient is applicable, stop
now. No adjustment is needed to the transaction
price, however use of it must be disclosed.
Practical Application Note: Remember, if the
practical expedient option is used, it MUST BE
disclosed!
Financing
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