The formulas
- Deferred payment: revenue = consideration / (1 + r)^(months/12)
- Advance payment: revenue = consideration x (1 + r)^(months/12)
- Financing = difference, recognized as interest over the period
How it works
ASC 606-10-32-15 adjusts the promised consideration for the time value of money when the timing of payments gives either party a significant financing benefit. Revenue then reflects the price the customer would have paid in cash when control transferred.
ASC 606-10-32-18 allows an entity not to adjust when, at contract inception, it expects the period between transfer and payment to be one year or less. The discount rate is the rate that would apply in a separate financing transaction between the entity and the customer.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
Is interest presented in revenue?
No. Interest income or expense is presented separately from revenue from contracts with customers.
Does an advance payment always create a financing component?
Not always. ASC 606-10-32-17 lists factors, such as payment timing at the customer's discretion or a reason other than financing, under which no significant financing component exists.
Which rate if the contract rate is lower?
Use the rate that reflects the customer's credit in a separate financing, not an attractive rate offered in the contract.
Sources
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.