Latest / PwC's accounting podcast / Revenue toolkit: Step three—Determine the transaction price

Transcript

Revenue toolkit: Step three—Determine the transaction price · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC.
• 0:05
  SPEAKER_01: Welcome to PWC's Accounting Podcast.
• 0:08
  SPEAKER_01: I'm Heather Horn.
• 0:10
  SPEAKER_01: Thanks for tuning in to the next episode of our Toolkit series, where we're taking a deep dive each month into a single topic, recapping the basics, but also focusing in on frequently asked questions and judgmental areas.
• 0:25
  SPEAKER_01: For the month of March, we're all about revenue recognition.
• 0:28
  SPEAKER_01: This week, we're moving on to step three of the revenue model, determining the transaction price.
• 0:47
  SPEAKER_02: I would say keep in mind that most contracts have some aspect of variable consideration, even if it may not be explicit in the contract.
• 0:57
  SPEAKER_01: As you may have already guessed, Angela Ferguson, a PWC National Office partner, is here with me today.
• 1:04
  SPEAKER_01: She's our continuity for the month of March, and today she's brought along a first-time guest, PWC National Office Director, Alexandra Pisqueux.
• 1:13
  SPEAKER_01: Alexandra's been helping us a lot behind the scenes, so I'm glad to hear her behind the microphone.
• 1:20
  SPEAKER_01: So with that, let's get down to determining the transaction price.
• 1:31
  SPEAKER_01: So, Alex, Angela, thanks so much for joining me today to move on to step three in the revenue recognition model.
• 1:40
  SPEAKER_01: And this will be we're going to be talking about determining the transaction price.
• 1:44
  SPEAKER_01: So, Angela, before you know we get into some of the detail, including some of the areas where there's a lot of judgment required, can you just give us some background on what's involved in this step?
• 1:54
  SPEAKER_03: Sure, Heather.
• 1:55
  SPEAKER_03: So just to also step back and recap, in our first podcast, we covered step one, which was identifying the contract.
• 2:03
  SPEAKER_03: Then in step two, we talked about identifying the performance obligations in that contract.
• 2:10
  SPEAKER_03: So now we're going to talk about step three, which is, like you said, determining the transaction price.
• 2:16
  SPEAKER_03: So the official definition of transaction price is the amount of consideration a company expects to be entitled to in exchange for transferring goods or services to a customer.
• 2:29
  SPEAKER_03: So this is going to include obviously any fixed fees, but it also includes variable fees or variable consideration, which is generally estimated as part of this step.
• 2:41
  SPEAKER_03: Transaction price also excludes amounts that are collected on the behalf of other parties, such as certain sales taxes that are collected and remitted to the government.
• 2:54
  SPEAKER_03: And then a few other issues that come up when determining transaction price include assessing whether a significant financing component exists, assessing non-cash considerations, such as when you receive equity instead of cash from a customer, and then payments that are made to the customer that will potentially reduce the transaction price.
• 3:17
  SPEAKER_01: Angela, I know we've talked about in particular variable consideration and definitely payments to customers in the past.
• 3:24
  SPEAKER_01: So why don't we start with those other two topics?
• 3:27
  SPEAKER_01: And that would be the significant financing components as well as non-cash consideration.
• 3:32
  SPEAKER_01: So, Alex, moving to you and welcome to your first podcast.
• 3:35
  SPEAKER_01: Can you walk us through the guidance on significant financing components?
• 3:40
  SPEAKER_02: Sure, Heather, and glad to be here today.
• 3:43
  SPEAKER_02: So a significant financing component may exist when there is a long period of time between when the customer pays and when the vendor performs.
• 3:53
  SPEAKER_02: And this timing difference can benefit either the customer or the vendor, meaning the vendor could be providing financing to the customer if the customer pays after the vendor performs.
• 4:07
  SPEAKER_02: Or on the other hand, the customer could be providing financing to the vendor if the customer pays before the vendor performs.
• 4:16
  SPEAKER_02: And in these situations, the revenue standard includes certain factors to consider when assessing whether you do have a significant financing component, as well as certain factors to consider when you don't have a significant financing component.
• 4:30
  SPEAKER_02: And if you conclude there is a significant financing component, it is accounted for separately.
• 4:36
  SPEAKER_02: And it results in either interest income or interest expense being recognized, depending on which party is receiving that financing.
• 4:45
  SPEAKER_02: So as a result of that, the amount of revenue recognized will differ from the cash received.
• 4:51
  SPEAKER_01: So I have a question on that, but Alex, before I go on, would you say there's more generally that it's the vendor providing to the customer or vice versa, or it just really depends on the particulars of an individual arrangement?
• 5:04
  SPEAKER_02: I would say it depends on the particular facts or circumstances.
• 5:09
  SPEAKER_01: All right.
• 5:09
  SPEAKER_01: So then Angela, pulling you in here, when do we normally see this come up?
• 5:15
  SPEAKER_03: So sometimes it's going to be obvious.
• 5:17
  SPEAKER_03: For example, the company is going to deliver a product up front, but then give the customer a period of time to pay for it, maybe even a couple of years.
• 5:27
  SPEAKER_03: So in that situation, it may be clear that there's a significant financing involved.
• 5:32
  SPEAKER_03: But then there's a number of situations where it may be less clear.
• 5:36
  SPEAKER_03: For example, in long long-term contracts where you have multiple payments on maybe in installments, but those payments don't directly line up with performance.
• 5:48
  SPEAKER_03: Or also when companies receive upfront deposits from the customer, you know, the question is, is that to provide a financing or is that for some other reason?
• 5:58
  SPEAKER_03: There's a few things in the guidance that help make this assessment a little bit easier.
• 6:04
  SPEAKER_03: First and foremost, there is a practical expedient, and that practical expedient applies if the period between payment and performance is less than one year.
• 6:15
  SPEAKER_03: And in that case, you do not have to account for any financing.
• 6:19
  SPEAKER_03: So we generally do see companies taking advantage of that expedient.
• 6:24
  SPEAKER_03: And then there are certain other exceptions, and a couple that I'll highlight.
• 6:29
  SPEAKER_03: In particular, when payment terms are structured for reasons other than providing financing, then it is not considered a significant financing.
• 6:39
  SPEAKER_03: So clearly that's going to require a lot of judgment, but we do see companies point to this guidance as the reason why an arrangement doesn't include financing, particularly when that is not what the parties intended when they negotiated the payment terms.
• 6:56
  SPEAKER_03: So to give an example, you know, a customer may pay part of the fee up front, but that's because they're demonstrating that they're committed to the arrangement and to make the purchase, not because they're providing some sort of financing to the vendor.
• 7:13
  SPEAKER_03: I'd say the takeaway here is that unless you can apply the expedient, you need to at least assess whether there's a significant financing if the timing of performance and payment differs.
• 7:27
  SPEAKER_03: And so that would generally be when that period of time is greater than one year.
• 7:32
  SPEAKER_01: All right.
• 7:32
  SPEAKER_01: And then Angela, for that practical expedient, do you have to sort of elect that overall for all your contracts?
• 7:39
  SPEAKER_01: And I know you said companies probably would anyway, or is it sort of on a contract-by-contract basis?
• 7:45
  SPEAKER_03: It's a policy that you would elect, and so you'd want to apply that consistently.
• 7:49
  SPEAKER_01: Okay, that's helpful.
• 7:51
  SPEAKER_01: So then let's go back to you, Alex, for the other topic that Angela mentioned earlier, and that would be non-cash consideration.
• 7:58
  SPEAKER_01: Is this something that we commonly see as an issue?
• 8:01
  SPEAKER_02: I would say it's not that common to see non-cash consideration, but it does come off from time to time.
• 8:08
  SPEAKER_02: And non-cash consideration, as the terminology implies, is when the company receives something other than cash in exchange for goods and services.
• 8:18
  SPEAKER_02: And what we most commonly see is stocks.
• 8:20
  SPEAKER_02: So this is when the customer will be paying stock to the vendor, like Angela mentioned in her opening.
• 8:27
  SPEAKER_02: And in terms of the accounting, non-cash consideration is measured at fair value, a contract inception, and then that amount would be included in the transaction price.
• 8:38
  SPEAKER_02: And then any change in fair value after contract inception do not impact revenue.
• 8:45
  SPEAKER_02: So for example, if the vendor receives stock, again, it is measured at fair value, a contract inception.
• 8:52
  SPEAKER_02: And then after that, the stock would be accounted for under other applicable guidance.
• 8:57
  SPEAKER_02: So again, depending on that nature of the non-cash consideration, in this example, the guidance for equity investments would apply for any changes in fair value.
• 9:08
  SPEAKER_01: So, Alex, let me ask you another question then, because we sometimes talk about non-monetary exchanges.
• 9:13
  SPEAKER_01: What would be the difference between that type of transaction and non-cash consideration?
• 9:18
  SPEAKER_02: Sure, Heather.
• 9:19
  SPEAKER_02: So a non-cash consideration transaction is a type of non-monetary exchange.
• 9:26
  SPEAKER_02: However, when you do have a non-monetary exchange with the customer, then you apply the non-cash consideration guidance in the revenue standard.
• 9:35
  SPEAKER_02: And there are certain arrangements that are scoped out of AAC 606, specifically non-monetary exchanges in the same line of business to facilitate sales to customers.
• 9:47
  SPEAKER_02: For example, inventory for inventory exchanges.
• 9:50
  SPEAKER_02: And these exchanges would be accounted for under the guidance in AAC 845, which is the guidance on non-monetary exchanges.
• 10:00
  SPEAKER_01: All right.
• 10:00
  SPEAKER_01: And then Alex, something else that comes to mind, probably because it's like practically in the newspaper every day these days, would be what if a company accepts like Bitcoin or some other type of a crypto asset as payment?
• 10:12
  SPEAKER_01: Is that also considered non-cash consideration?
• 10:15
  SPEAKER_02: Yeah, that is a good point.
• 10:17
  SPEAKER_02: We haven't seen this a lot to date, but this is something that we expect to come up in the future.
• 10:23
  SPEAKER_02: And crypto assets that don't meet the definition of cash would be non-cash consideration and would follow the model that I just described.
• 10:32
  SPEAKER_02: So they would be fair valued at contract inception, and then the changes in fair value would be accounted for in accordance with that nature of the crypto asset, which often is classified as an intangible asset.
• 10:46
  SPEAKER_01: All right, very helpful.
• 10:47
  SPEAKER_01: Thank you.
• 10:48
  SPEAKER_01: And like you said, I think we probably will see you start seeing more of that.
• 10:52
  SPEAKER_01: So then, Alex, sticking with you, let's go back to a couple of the other topics Angela mentioned.
• 10:58
  SPEAKER_01: And one would be variable consideration.
• 11:00
  SPEAKER_01: You know, we've done a whole podcast on that, and we'll include a link to that in the show notes.
• 11:05
  SPEAKER_01: But just to help and for completeness of this discussion, what are some of the examples of what we're talking about when we say variable consideration?
• 11:15
  SPEAKER_02: Yeah, there are a lot of examples of variable consideration, but some common examples include rebates or refunds, including those under ride or return of products, performance bonuses is another example.
• 11:30
  SPEAKER_02: This one is when the company gets this bonus if management achieves certain targets, penalties, such as those resulting from failing to perform under service level agreements or liquidated damages, price adjustments, for example, those that we see under price protection clauses.
• 11:50
  SPEAKER_02: And then even royalties and usage-based fees are another type of variable consideration.
• 11:56
  SPEAKER_02: And the other thing to keep in mind is that variable consideration may not be explicit in the contract.
• 12:04
  SPEAKER_02: So, for example, as Angela and Pat mentioned in the first episode, price concessions that a company expects to give a customer would also result in variable consideration.
• 12:14
  SPEAKER_01: So, Alex, it almost seems like anything that could potentially change the price being paid is variable consideration.
• 12:21
  SPEAKER_01: Is that too broad of a statement?
• 12:24
  SPEAKER_01: I'll say generally, if that's the case.
• 12:26
  SPEAKER_01: All right, always safe to say generally, but that's good.
• 12:29
  SPEAKER_01: At least it helps people know what to look out for.
• 12:31
  SPEAKER_01: So then let's assume you are dealing with variable consideration.
• 12:35
  SPEAKER_01: Can you uh provide a refresh on the accounting model?
• 12:38
  SPEAKER_02: Yes.
• 12:39
  SPEAKER_02: So the general model for accounting for variable consideration is that it's estimated at contract inception subject to what we call a constraint.
• 12:48
  SPEAKER_02: And that estimate is reassessed at each reporting date until the uncertainty is resolved.
• 12:55
  SPEAKER_02: And the standard provides two methods for estimating variable consideration.
• 13:00
  SPEAKER_02: The first method is the expected value method.
• 13:04
  SPEAKER_02: And this is where the estimate is based on a range of possible outcomes and the probabilities associated with each outcome.
• 13:12
  SPEAKER_02: And we have seen this method being used appropriately when there is a large number of contracts that have similar characteristics.
• 13:21
  SPEAKER_02: So particularly for estimating sales returns.
• 13:25
  SPEAKER_02: The second method is what we call the most likely amount method.
• 13:30
  SPEAKER_02: And this method estimates variable consideration based on the single most likely amount in a range of possible consideration amounts.
• 13:40
  SPEAKER_02: This method is generally appropriate when there are two possible outcomes.
• 13:44
  SPEAKER_02: So, for example, management achieving a performance bonus or not achieving that performance bonus.
• 13:51
  SPEAKER_02: And last thing I will mention on the model is that the method selected is not a policy choice.
• 13:57
  SPEAKER_02: And that should be based on the approach that better predicts the amount of consideration.
• 14:03
  SPEAKER_02: And then whatever meta method is selected by the company, it would have to be applied consistently to similar types of variable consideration.
• 14:12
  SPEAKER_01: Okay.
• 14:13
  SPEAKER_01: So with that then, Angela, let me go back to you because at the very beginning, Alex mentioned that variable consideration is subject to constraint.
• 14:22
  SPEAKER_01: And then we kind of skipped over that.
• 14:24
  SPEAKER_01: So can you elaborate what we mean by that?
• 14:27
  SPEAKER_03: Sure.
• 14:27
  SPEAKER_03: So the principle is that variable consideration should be included in the transaction price to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved.
• 14:44
  SPEAKER_03: So obviously, you could tell I was reading that because I wanted to get it.
• 14:48
  SPEAKER_03: How did they get the words exactly right?
• 14:50
  SPEAKER_03: But at a high level, you're assessing whether it's probable you're not going to have to reverse revenue in the future.
• 14:57
  SPEAKER_03: So probable is used in the same way we think about probable in other areas of accounting guidance.
• 15:03
  SPEAKER_03: So usually that's viewed as a 75% or higher likelihood.
• 15:09
  SPEAKER_03: So this essentially adds a layer of conservatism to this variable consideration estimate.
• 15:16
  SPEAKER_03: And there are some factors in the guidance that tell you or indicate when variable consideration may need to be constrained.
• 15:25
  SPEAKER_03: So I won't go through all of them, but a couple that I would highlight include when the variability is based on factors outside the company's control, such as a market or the activities or actions of other parties.
• 15:40
  SPEAKER_03: And another one is when the company's experience with similar contracts is limited, or if that experience is not going to be predictive in a particular situation.
• 15:52
  SPEAKER_01: So, Angela, if you have these factors, and I know you said there's others as well, does that mean then that all of your variable consideration is constrained, or is only part of it?
• 16:02
  SPEAKER_01: Do you automatically have to assume that?
• 16:05
  SPEAKER_03: It definitely does not mean that you can or should default to an estimate of zero consideration.
• 16:12
  SPEAKER_03: So, for example, if you're estimating returns for a brand new product that you've never sold before, you may have some of these factors because you don't have experience with returns of that product.
• 16:25
  SPEAKER_03: And uh the returns are somewhat outside of your control because it depends on the actions of the customer.
• 16:32
  SPEAKER_03: However, it would be very unusual then to estimate zero consideration because you'd be assuming everyone is going to return the product.
• 16:42
  SPEAKER_03: So, of course, this is where there's going to be a lot of judgment.
• 16:45
  SPEAKER_03: You're going to have to come up with some estimate, and that might be based on, for example, returns of similar types of products with perhaps some sort of adjustment in the um, you know, the particular circumstances.
• 16:57
  SPEAKER_01: And I guess to that point, Angela, this is something that is fluid from the point of view is like you might estimate it and say January, but then for contracts in July, once you have more experience, you would update those estimates.
• 17:11
  SPEAKER_01: You wouldn't just say, oh, forever more for this type of contract.
• 17:14
  SPEAKER_01: I'm going to make this assumption.
• 17:16
  SPEAKER_03: Absolutely.
• 17:17
  SPEAKER_03: Yeah, you'd have to continue to update your estimate for every new contract.
• 17:21
  SPEAKER_03: And if a contract's not completed yet, as Alex mentioned, you're continuing to update variable consideration estimates each period until that uncertainty is resolved.
• 17:32
  SPEAKER_03: So until you know what the final outcome is.
• 17:35
  SPEAKER_01: All right, that's helpful.
• 17:36
  SPEAKER_01: And then just one other point to clarify.
• 17:39
  SPEAKER_01: So is this sort of a two-step process?
• 17:42
  SPEAKER_01: So first I estimate variable consideration and then I apply the constraint on top of that, or how do those interact with each other?
• 17:49
  SPEAKER_03: The model is set up that way in these two steps, estimating in the one of the two ways that Alex described, and then applying the constraint.
• 17:59
  SPEAKER_03: But I would say that practically companies sometimes sort of bake in or consider this constraint when they're coming up with their estimates.
• 18:08
  SPEAKER_03: So it's not always going to be two discrete steps.
• 18:13
  SPEAKER_03: It may just be all incorporated into how you come up with your estimate.
• 18:17
  SPEAKER_01: Okay, that makes sense.
• 18:18
  SPEAKER_01: So then definitely we've said a lot of words, starting with what you read to us, Angela.
• 18:24
  SPEAKER_01: So I think sometimes with these it helps to have actually specific examples.
• 18:28
  SPEAKER_01: So, Alex, can you take us through an example of a type of variable consideration we would frequently see?
• 18:36
  SPEAKER_02: Yeah, so one issue that comes up frequently is the accounting for guarantees or potential penalties in a contract.
• 18:44
  SPEAKER_02: And I'm using the term guarantee here pretty broadly because it can refer to different things.
• 18:50
  SPEAKER_02: And to give an example, service contracts will often include service level agreements or what we call SLAs.
• 18:59
  SPEAKER_02: And SLAs are commonly used by companies that sell products or services that may be critical to the customer's operations, where perhaps the customer cannot afford to have product failures or service outages or interruptions.
• 19:15
  SPEAKER_02: So, for example, a vendor might guarantee that its technology will maintain a 99.99% uptime during the year, or the customer will be entitled to a refund.
• 19:28
  SPEAKER_02: That potential refund in that case would be considered variable consideration.
• 19:34
  SPEAKER_02: And as I mentioned before, the company would need to estimate the refund and apply the constraint as we talked about.
• 19:42
  SPEAKER_02: So that is the transaction price would only include consideration that it is probable the company will not have to pay back in the form of a refund to the customer.
• 19:53
  SPEAKER_01: And then, Angela, from your experience, where are we often seeing judgments or challenges in accounting for these service level agreements or similar guarantees?
• 20:03
  SPEAKER_03: I'd say that the challenge is often really just navigating whether those kinds of terms represent variable consideration or whether it's really a warranty or even a guarantee that's outside the scope of ASC606 altogether.
• 20:21
  SPEAKER_03: So a warranty typically provides assurance that a product is going to function as intended.
• 20:28
  SPEAKER_03: Although a warranty could also apply to services.
• 20:32
  SPEAKER_03: But importantly, the remedy when an issue arises that's under warranty protection, the fix is that the company is either going to repair or replace the product or reperform the service, or otherwise they're going to fix the problem.
• 20:49
  SPEAKER_03: So these assurance type warranties are accounted for as loss contingencies.
• 20:55
  SPEAKER_03: So the estimated cost to repair or replace the product or reperform the service would be accrued when revenue is recognized.
• 21:04
  SPEAKER_03: But in contrast, if a company is going to have to pay cash back to the customer because something didn't go right or something didn't function as intended, that is not a warranty cost.
• 21:18
  SPEAKER_03: That is actually a refund or a penalty like Alex described.
• 21:23
  SPEAKER_03: So it would be accounted for as variable consideration and would reduce the transaction price.
• 21:29
  SPEAKER_03: And then something else to look out for is whether, like I said, this promise or guarantee is not even in the scope of ASC 606 because it's a guarantee in the scope of ASC 460.
• 21:43
  SPEAKER_03: And this is something Pat and I talked about in step one when we were talking about scoping.
• 21:48
  SPEAKER_03: And generally, this would occur, for example, when a company is not guaranteeing their own performance, but they're guaranteeing the performance of another party.
• 21:59
  SPEAKER_03: So that is all.
• 22:00
  SPEAKER_03: Also, something to look out for.
• 22:02
  SPEAKER_01: And then I'll ask this question to both of you.
• 22:04
  SPEAKER_01: So any other reminders when we're dealing with variable consideration?
• 22:08
  SPEAKER_01: And Alex, maybe I'll go to you first.
• 22:10
  SPEAKER_02: Yes, I mentioned royalties and usage-based fees as a type of variable consideration.
• 22:16
  SPEAKER_02: One thing to note is that there is specific guidance for royalties and usage-based fees that are received in exchange for a license of intellectual property.
• 22:27
  SPEAKER_02: And although these fees represent variable consideration, the FASBI decided to provide an exception that these fees should not be recognized until the underlying sale or usage occurs.
• 22:41
  SPEAKER_02: And to give an example, consider a company that licenses its IP to a customer, and that customer uses the IP to create its own product to further sell to third parties.
• 22:54
  SPEAKER_02: And the way the company is compensated is based on a percentage of those third party sales.
• 23:00
  SPEAKER_02: So without this exception, the company would have to estimate those third-party sales, apply the royalty percentage, and then recognize that revenue up front when the performance obligation is satisfied.
• 23:13
  SPEAKER_02: So under this exception, the sales-based royalty cannot be recognized until the period the customer sales occur.
• 23:22
  SPEAKER_02: Essentially, the FASB decided that trying to estimate that royalty up front in this case would not provide useful information to the users of the financial statements.
• 23:33
  SPEAKER_02: And maybe just to clarify, the exception actually comes into play into step five because it is a constraint on recognition.
• 23:43
  SPEAKER_02: But I did want to bring it up as part of the stuff because, again, it is an example of variable consideration.
• 23:49
  SPEAKER_03: Yeah, and just to jump in here as well, I mean, something important to remember is that because this is an exception, it's narrowly defined.
• 23:58
  SPEAKER_03: And so you have to meet the exception definition in order to apply it.
• 24:03
  SPEAKER_03: So specifically, as uh Alex said, this applies when the royalties relate to a license of intellectual property.
• 24:11
  SPEAKER_03: So if you're receiving a royalty or usage-based fee for something else, for example, you sell a product and earn a fee based on usage of that product, you cannot apply this exception and you would have to follow the regular variable consideration guidance, even though that may be difficult to do, and even though the FASB acknowledged that might not be useful, you still can't apply the exception in that case.
• 24:39
  SPEAKER_03: And also the exception doesn't apply to any fixed amounts.
• 24:43
  SPEAKER_03: So if you have a minimum royalty in your contract, that would not be part of the exception.
• 24:49
  SPEAKER_03: You would have to recognize that as fixed consideration.
• 24:54
  SPEAKER_01: All right, that's helpful.
• 24:55
  SPEAKER_01: So then just to wrap things up, anything else that we should focus on as part of step three?
• 25:01
  SPEAKER_03: Well, we can't have this podcast without talking about payments to customers.
• 25:05
  SPEAKER_01: I was hoping you'd bring that up.
• 25:08
  SPEAKER_03: But in a way, we've already touched on it a bit because a payment to a customer is often just another form of variable consideration because it could be a refund back to the customer or a discount that reduces transaction price.
• 25:23
  SPEAKER_03: But just to recap the model, a payment to a customer is a reduction of transaction price and therefore reduces revenue, unless both the company is receiving a distinct good or service in exchange for that payment to the customer, and the amount, the amount being paid, does not exceed the fair value of that good or service they are receiving.
• 25:48
  SPEAKER_03: So some of the issues that we do wrestle with in this area include obviously assessing whether the company really is receiving something distinct in exchange for the payment to the customer.
• 26:01
  SPEAKER_03: And then also this topic is much more complex when you have arrangements that have multiple parties, such as a seller, a buyer, and then an intermediary like a platform or a reseller.
• 26:15
  SPEAKER_03: Because when you have multiple parties, it may not always be clear which party or maybe multiple parties are your customer.
• 26:24
  SPEAKER_03: So if you are giving incentives or coupons, you would first have to assess whether it's a payment to the customer at all and whether this guidance would apply.
• 26:35
  SPEAKER_03: And we did record a podcast on payments to customers.
• 26:39
  SPEAKER_03: So that was about a year ago.
• 26:40
  SPEAKER_03: So we did get into more details on that podcast on this guidance.
• 26:45
  SPEAKER_01: Yes, I remember you and Jay Sulliver were on that podcast with me, and definitely a lot to think about there.
• 26:50
  SPEAKER_01: So we'll make sure that we link that podcast in the show notes, and I highly recommend people listen to it.
• 26:57
  SPEAKER_01: So maybe then sticking to step three and what we talked about today, if just to wrap things up, if you're talking to clients or engagement teams and trying to kind of give them some overall advice dealing with step three, what's sort of a key takeaway for you?
• 27:14
  SPEAKER_01: And Alex, starting with you.
• 27:17
  SPEAKER_02: I would say keep in mind that most contracts have some aspect of variable consideration, even if it may not be explicit in the contract.
• 27:27
  SPEAKER_01: Okay, something to look out for.
• 27:29
  SPEAKER_01: And how about you, Angela?
• 27:30
  SPEAKER_03: I mean, I'd say an issue I just run into a lot is when companies assume that terms that provide guarantees to the customer are automatically going to be a warranty.
• 27:42
  SPEAKER_03: But as I talked about, sometimes this is actually going to be variable consideration, especially if you're giving cash back to the customer, or it could even be something that is outside the scope of the revenue standard altogether.
• 27:56
  SPEAKER_03: So that is something to just be aware of and be on the lookout for.
• 28:00
  SPEAKER_03: And then I'll also give a little bit of a teaser here for next week's podcast, because when we get to step four, which is allocating the transaction price, we're gonna talk about variable consideration again, because variable consideration becomes very important when it comes to how do you allocate that variable consideration.
• 28:20
  SPEAKER_01: So Alex already gave us a preview that we're gonna talk about again, it sounds like with step five.
• 28:25
  SPEAKER_01: So it sounds like this will be a little bit of a theme in our our remaining episodes.
• 28:30
  SPEAKER_01: So uh before we get to those episodes though, Alex, uh final question for you.
• 28:36
  SPEAKER_01: Well, almost final question for you.
• 28:38
  SPEAKER_01: So if people want to know more about step three, where should they go for more information?
• 28:43
  SPEAKER_02: Yeah, so if our listeners want to learn more about the topics, I would encourage checking out our podcast on payments to customers and variable consideration, as well as uh chapter four of our revenue guide.
• 28:57
  SPEAKER_01: All right, so now we're finally to the final questions.
• 29:00
  SPEAKER_01: And as Angela well knows, it's by far my favorite part of the podcast.
• 29:05
  SPEAKER_01: Um have some stump the guest questions, and the producers definitely have some good ones for us today.
• 29:11
  SPEAKER_01: So, two questions for you, and either one of you can chime in.
• 29:15
  SPEAKER_01: I know um Alex, Angela brought you along with the hope you'll be able to help with these.
• 29:19
  SPEAKER_01: So please feel free to go first.
• 29:22
  SPEAKER_01: So listen carefully to this.
• 29:24
  SPEAKER_01: So, first one, under step three of the revenue model, accountants sometimes have to exercise careful attention in a number of areas to ensure they've determined the correct transaction price.
• 29:36
  SPEAKER_01: Fortunately, they usually have a contract, purchase order, or other supporting documentation to go by.
• 29:42
  SPEAKER_01: Unlike contestants in what game show, that's the longest-running game show in American TV history.
• 29:49
  SPEAKER_01: The hint, I guess, there is that you in that game show, they're guessing transaction prices.
• 29:56
  SPEAKER_03: Oh, so it'd be prices right, right?
• 30:02
  SPEAKER_01: Fact check, great minds think alike.
• 30:06
  SPEAKER_01: Nice work, Angela and Alex.
• 30:08
  SPEAKER_01: The correct answer is the price is right.
• 30:11
  SPEAKER_01: And am I the only one who fondly remembers getting to stay home from school sick and watching daytime TV like the price is right?
• 30:19
  SPEAKER_01: Ugh, to go back to those days.
• 30:26
  SPEAKER_01: So that's question one.
• 30:27
  SPEAKER_01: Now, this next one might be a little harder.
• 30:29
  SPEAKER_01: All right, so clearly a hard time stuffing you on that one.
• 30:33
  SPEAKER_01: Um, so I'm gonna pick something outside revenue, uh, and we're gonna move to financial instruments.
• 30:39
  SPEAKER_01: So, but it's it's tied to the first question.
• 30:42
  SPEAKER_01: 1972 was the first year that the prices right aired.
• 30:46
  SPEAKER_01: In that same year, the first financial derivatives also began trading on what exchange?
• 30:53
  SPEAKER_03: Any guesses?
• 30:54
  SPEAKER_03: I'm showing that I don't really know what exchange is that derivatives.
• 30:58
  SPEAKER_01: That's fine.
• 30:58
  SPEAKER_01: You're revenue specialist, not derivative specialists.
• 31:01
  SPEAKER_01: And of course, we couldn't have you get both questions right.
• 31:08
  SPEAKER_01: Fact check.
• 31:09
  SPEAKER_01: Okay, to be fair, this was a hard one.
• 31:12
  SPEAKER_01: And perhaps out of Angela and Alex's comfort zone, the correct answer is the Chicago Mercantile Exchange.
• 31:19
  SPEAKER_01: So, from the price is right to the Chicago Mercantile Exchange, there's definitely something for everyone on this show.
• 31:31
  SPEAKER_01: So, and I appreciate both of you guys playing along.
• 31:34
  SPEAKER_01: And also, Alex, as I said, thanks for joining us.
• 31:36
  SPEAKER_01: And Angela, always nice to have you back.
• 31:38
  SPEAKER_01: So, thanks both for all your insight.
• 31:40
  SPEAKER_02: Thanks for having us today.
• 31:43
  SPEAKER_01: That's our show for today.
• 31:45
  SPEAKER_01: We're halfway through our revenue recognition deep dive.
• 31:48
  SPEAKER_01: So, if you've missed any of the previously issued episodes, head on over to wherever you listen to your podcast to hear what you missed.
• 31:56
  SPEAKER_01: Join me back here next Tuesday for a new episode looking at allocating the transaction price.
• 32:02
  SPEAKER_01: Now, of course, that we've determined it.
• 32:05
  SPEAKER_01: And don't forget to join me this Thursday for a new episode in our Finance 2025 series.
• 32:11
  SPEAKER_01: This week we're focusing on the intersection of finance transformation and ESG.
• 32:17
  SPEAKER_01: If you've been asking yourself, where do you start?
• 32:20
  SPEAKER_01: You're not alone.
• 32:21
  SPEAKER_01: Everyone's starting at a different point and everyone's trying to get to a different spot.
• 32:26
  SPEAKER_01: So tune in as we help you benchmark yourself against your peers and help give you some strategies to reach your long-term goals.
• 32:35
  SPEAKER_01: So that you never miss any of PWC's audio content, follow our accounting podcast series wherever you listen to your podcasts.
• 32:43
  SPEAKER_01: From Thought Leadership at PWC, I'm Heather Horn.
• 32:48
  SPEAKER_01: Thanks for tuning in.
• 32:56
  SPEAKER_00: This podcast is brought to you by PWC, All Rights Reserved.
• 33:00
  SPEAKER_00: PwC refers to the U.S.
• 33:02
  SPEAKER_00: member firm or one of its subsidiaries or affiliates, and they sometimes refer to the PWC network.
• 33:08
  SPEAKER_00: Each member firm is a separate legal entity.
• 33:10
  SPEAKER_00: Please see www.pwc.com slash structure for further details.
• 33:16
  SPEAKER_00: This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors.