In January, February and March we talked about the Revenue Recognition standard (effective for nonpublic entities with annual reporting periods beginning after December 15, 2018) and the first two steps in the five-step model of revenue recognition. We want to be sure it’s clear: companies that have not yet adopted the standard should plan now to determine how it will affect them in 2019. Here’s a look at the third step in the model:
Determine transaction price
To determine the transaction price, the revenue recognition standard requires consideration of several factors, including items likely in the contract, like discounts, rebates and refunds. It also requires considering things that may not be in the buyer or seller’s control like price changes due to market volatility or weather. Time value of money must also be considered if the customer pays long after or before delivery. Goods or services purchased with consideration other than cash need to be measured at fair value of what is being received.
Also, if the contract indicates the seller owes something to the buyer in addition to the good or service, the revenue recognized is reduced by that amount.