Does the transaction price include a significant financing component?

A significant financing component will exist if the timing of payment (explicitly or implicitly) provides the customer, or the entity, with a significant benefit or financing the transfer of goods or services. This situation may arise when payment occurs significantly before, or after, a performance obligation has been satisfied.

Factors that indicate a significant financing component exists include the difference between the promised consideration and the cash selling price of the promised good or service and the combined effect of the expected length of time between the time the entity transfer the promised good or service, when the customer pays for it and the prevailing interest rates in the market.

A significant financing component does not exist if any of the following are present:

  • The customer paid for the goods or services in advance and the timing of the transfer of the related good or service is at the discretion of the customer,
  • A substantial amount of consideration is variable and the amount or timing of that consideration varies upon the occurrence, or non-occurrence, of a future event that is not substantially in the control of the customer or the entity,
  • The difference between the promised consideration and cash selling price of the good or service arises for reasons other than the provision of finance to either the customer or the entity and the difference is proportional to the reason for the difference.

As a practical expedient, if it is anticipated the timing between an entity transferring a promised good or service and receiving payment is less than one year then an entity can conclude a significant financing component does not exist.ASC 606-10-32-15 thru ASC 606-10-32-17

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