ACCT 3520 Lecture Notes - Lecture 7: Gift Card, Credit Risk
Determining the Transaction Price – Step 3: Time Value of Money
• In most instances, companies receive consideration after the product is provided or the service
is performed
• The company provides “short-term financing” (less than 1 year)
• Usually, the time value of money is considered only if the contract involves a significant
financing component
• When a sales transaction involves a significant financing component, the amount of revenue is
determined by discounting the payments
• The discount rate reflects the customer’s credit risk
• Report the effects as either interest expense or interest revenue
• No explicit requirement under A S P E, but use the fair value model
Determining the Transaction Price – Step 3: Non-Cash Consideration
• When companies receive consideration in the form of goods, services, or other non-cash
consideration, they will recognize revenue based on the fair value of what is received
• If customers contribute goods or services to fulfil a contract, it should be treated as a non-cash
consideration and included in the transaction price, as long as control has passed to the
company
Determining the Transaction Price – Step 3: Consideration Paid or Payable
• Consideration paid or payable covers items like vouchers, coupons or gift cards
• The impact is to reduce the consideration received and the revenue to be recognized
• Example: Ocean Limited sells a $500 gift card to a customer on January 1, with no expiry date.
Based on past gift card sales, 85% of gift cards are redeemed and 15% are unexercised. On
December 31, the customer makes one purchase of $50 using the gift card. (Expected
redemption: $500 x 85% = $425)
Allocating the Transaction Price to Separate Performance Obligations – Step 4
Document Summary
Determining the transaction price step 3: time value of money. In most instances, companies receive consideration after the product is provided or the service is performed. The discount rate reflects the customer"s credit risk: report the effects as either interest expense or interest revenue, no explicit requirement under a s p e, but use the fair value model. Determining the transaction price step 3: non-cash consideration: when companies receive consideration in the form of goods, services, or other non-cash consideration, they will recognize revenue based on the fair value of what is received. If customers contribute goods or services to fulfil a contract, it should be treated as a non-cash consideration and included in the transaction price, as long as control has passed to the company. Determining the transaction price step 3: consideration paid or payable: consideration paid or payable covers items like vouchers, coupons or gift cards.
