Step 3-Determine the Transaction Price

Abstract

A revenue recognition model requires entities to consider the terms of the contract and the entity's customary business practices to determine the transaction price. Conceptually, the Standard recognizes that a contract with a financing component has two transactions: a sale and a financing. If a contract has a significant financing component, the entity should account for the financing component and adjust the transaction price. The entity should separate the loan component from the revenue component. Interest income or expense resulting from a financing should be presented separately from the revenue component. Once a performance obligation is satisfied, the entity recognizes the present value of the consideration as revenue. A narrow exception to the guidance on constraints in variable consideration involves sales-based or usage-based royalty consideration promised in exchange for a license of intellectual property only.