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company can easily separate out the Entities that extend credit to their
financing component of the transaction. customers will often incur various ad- It is possible
If the company allows for credit-risk ad- ditional costs necessary for them to
that in some cases
justed prices, cash discounts, or variable offer this type of short-term credit to
pricing based on length of credit terms, their customer base — such as increased a financing
then the difference between the cash sale salaries relating to managing receivables
price and the invoice price could be the and credit risk, credit insurance, factor- component exists
but that there may
implied financing component. Where ing arrangements, working capital loans,
the company allows for sales discounts and lines of credit. These increased
(pay promptly discounts), any discounts costs are typically incorporated into the be some doubt about
forfeited by the customer who pays late sales price of the product and are rarely its significance.
could be considered a financing compo- explicit in the customer contract or the
nent. In a situation in which a company invoice. Due to the fact that these costs
cannot extract this information, it can are passed on to the customers in the transaction price. Instead, ASC Para-
find clarity within the guidance: form of higher prices, the seller likely graph 606-10-32-20 provides guidance
can support the position that the agreed- for determining the circumstances under
The objective when adjusting the upon contract price includes a financing which an entity should separately report
promised amount of consideration for component, even when the contract does interest income:
a significant financing component is not explicitly refer to this delay of cash
for an entity to recognize revenue at transfer as a form of financing provided An entity shall present the effects of
an amount that reflects the price that to the buyer. This logic is consistent financing (interest income or inter-
a customer would have paid for the with that of the provided guidance, est expense) separately from revenue
promised goods or services if the cus- which states: from contracts with customers in the
tomer had paid cash for those goods statement of comprehensive income
or services when (or as) they transfer In determining the transaction price, (statement of activities). Interest
to the customer (that is, the cash sell- an entity shall adjust the promised income or interest expense is recog-
ing price). An entity shall consider all amount of consideration for the nized only to the extent that a con-
relevant facts and circumstances in effects of the time value of money tract asset (or receivable) or a contract
assessing whether a contract contains if the timing of payments agreed to liability is recognized in accounting
a financing component and whether by the parties to the contract (either for a contract with a customer. …
that financing component is signifi- explicitly or implicitly) provides
cant to the contract, including both the customer or the entity with a Thus, any significant financing com-
of the following: significant benefit of financing the ponent should be reported as either in-
a. The difference, if any, between the transfer of goods or services to the terest income or interest expense rather
amount of promised consideration customer. In those circumstances, than being included in the transaction
and the cash selling price of the the contract contains a significant price and recognized as sales revenue.
promised goods or services financing component. A significant
b. The combined effect of both of the financing component may exist The practical expedient
following: regardless of whether the promise of Notably, ASC Paragraph 606-10-32-18
1. The expected length of time be- financing is explicitly stated in the offers preparers a practical expedient:
tween when the entity transfers contract or implied by the payment
the promised goods or services terms agreed to by the parties to the As a practical expedient, an entity
to the customer and when the contract. 9 need not adjust the promised amount
customer pays for those goods of consideration for the effects of a
or services The guidance indicates that any sig- significant financing component if
2. The prevailing interest rates in nificant financing component, explicit or the entity expects, at contract incep-
the relevant market. 8 implicit, should not be recognized in the tion, that the period between when

8. ASC Paragraph 606-10-32-16. 9. ASC Paragraph 606-10-32-15.

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