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Scope

If it is determined the variable payments relate partially or fully to the lease component, the variable
payments are excluded from the allocation for initial measurement. They are instead subsequently
allocated between the lease and nonlease components when the underlying event occurs and then
recognized in accordance with ASC 842-10-15-40. Variable payments that are specifically related to
the nonlease component are included in the allocation for initial measurement.

If allocating the variable consideration entirely to the nonlease component is consistent with the
transaction price allocation objective in ASC 606, the variable payment should be allocated entirely to
the nonlease component. The transaction price allocation objective is explained in ASC 606-10-32-28
through 32-41, and excerpts are included below for reference.

ASC 606-10-32-28
The objective when allocating the transaction price is for an entity to allocate the transaction price to
each performance obligation (or distinct good or service) in an amount that depicts the amount of
consideration to which the entity expects to be entitled in exchange for transferring the promised
goods or services to the customer.

ASC 606-10-32-29

To meet the allocation objective, an entity shall allocate the transaction price to each performance
obligation identified in the contract on a relative standalone selling price basis in accordance with
paragraphs 606-10-32-31 through 32-35, except as specified in paragraphs 606-10-32-36 through 32-
38 (for allocating discounts) and paragraphs 606-10-32-39 through 32-41 (for allocating consideration
that includes variable amounts).

ASC 606-10-32-40

An entity shall allocate a variable amount (and subsequent changes to that amount) entirely to a
performance obligation or to a distinct good or service that forms part of a single performance
obligation in accordance with paragraph 606-10-25-14(b) if both of the following criteria are met:
a. The terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance
obligation or transfer the distinct good or service (or to a specific outcome from satisfying the
performance obligation or transferring the distinct good or service).
b. Allocating the variable amount of consideration entirely to the performance obligation or the
distinct good or service is consistent with the allocation objective in paragraph 606-10-32-
28 when considering all of the performance obligations and payment terms in the contract.

If the transaction price allocation objective is not met, the variable payment should be included in the
initial contract consideration and allocated to the lease and nonlease components based on their
relative standalone selling prices.

It is common for suppliers in certain industries to structure transactions with significant variable
payments. Suppliers in these industries are willing to accept variability in payments because they
believe such arrangements will be profitable overall, and variable payments can make an arrangement
attractive to the customer. In certain instances, transactions with significant variable payments may
qualify as both a transfer of control under ASC 606 and as a sales-type lease under ASC 842. In these
instances, the leases standard should be applied. Under ASC 842, variable payments that do not
depend on an index or rate and are at least partially related to the lease asset, are not considered until

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