Definition
Under ASC 606, the transaction price is the amount of consideration the entity expects to be entitled to in exchange for transferring goods or services, excluding amounts collected for third parties such as sales taxes. Determining it requires considering variable consideration, significant financing components, noncash consideration, and consideration payable to the customer, such as rebates or slotting fees. The price is then allocated to performance obligations, generally in proportion to relative standalone selling prices.
Why it matters in an audit or review
Errors in estimating the price flow directly to revenue and contract balances. Auditors test whether discounts, rebates, and returns reduce the price and whether the expected collectibility threshold (probable) was met for the contract to exist. A practical expedient lets entities skip a financing component when the gap between payment and transfer is one year or less.
Example
(Illustrative) A customer buys 1,000 units at $50 with a 4% volume rebate if it exceeds 900 units. If the customer is expected to qualify, the price per unit is $48 and revenue is $48,000, not $50,000.
Common mistakes
- Recognizing rebates as marketing expense instead of a price reduction.
- Including sales tax collected in revenue.
Sources
- FASB ASC 606-10-32-2 through 32-27 (determining the transaction price)
- FASB ASC 606-10-32-18 (financing component practical expedient)
- FASB ASC 606-10-25-1 (contract criteria, including collectibility)
- FASB ASC 606-10-32-28 through 32-41 (allocation)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error