B2W Flipbooks

Page | 45 STEP 2: ASSESS THE SIGNIFICANCE • Assess at the contract level. Practical Application Note: Note that typical retainage terms customarily used in construction contracts does not constitute fi nancing. • Assessment should typically be done at the contract inception. However, parties may need to reassess if material contract modifi cations are made. • Assessment is based on relevant, individual facts and circumstances. • Only in situations where the fi nancing component is signifi cant in relation to the contract, would an adjustment to the price be needed. The signifi cance of a fi nancing component should include: • The diff erence, if any, between the amount of promised consideration and the cash selling price of the promised goods or services. • The combined eff ect of both of the following: - The expected length of time between when the entity transfers promised goods or services and when the customer pays for those goods or services. - The prevailing interest rate in the relevant market. Practical Application Note: Two conditions must exist before a fi nancing component is recognized. First, there must be a fi nancing component. Second, the fi nancing component must be signifi cant to the contract. The longer the time between performance and payment, the more likely a signifi cant fi nancing component exists. A signifi cant fi nancing component does not exist in all situations, even if there is a long-time diff erence between transfer and payment. The standard provides factors that indicate that a signifi cant fi nancing component does not exist. A signifi cant fi nancing component would not exist if any of the following factors were present: • The customer paid for the goods or services in advance, and the timing of the transfer of those goods and services is at the discretion of the customer. • A substantial amount of the consideration promised by the customer is variable, and the amount or timing of that consideration varies on the basis of the occurrence or nonoccurrence of a future event that is not substantially within the control of the customer or the entity (for example, if the consideration is a sales-based royalty). • The diff erence between the promised consideration and the cash selling price of the good or service arises for reasons other than the provision of fi nance to either the customer or the entity, and the diff erence between those amounts is proportional to the reason for the diff erence. For example, the payment terms might provide the entity or the customer with protection from the other party failing to adequately complete some or all of its obligations under the contract. Financing (continued) >

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