Transaction Price

Definition

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. It represents the monetary value of a transaction between a seller and a buyer.

5 Must Know Facts For Your Next Test

1. The transaction price is the amount of consideration that the entity expects to receive from the customer in exchange for transferring the promised goods or services.
2. The transaction price must be allocated to the distinct performance obligations identified in the contract, which represent the unit of account for revenue recognition.
3. Variable consideration, such as discounts, rebates, or performance bonuses, must be included in the transaction price to the extent that it is highly probable a significant reversal in the amount of cumulative revenue recognized will not occur.
4. The transaction price may be fixed, variable, or a combination of both, and it can be influenced by factors like the customer's credit risk and the entity's intentions to accept a lower price.
5. Entities must consider the time value of money when determining the transaction price if the contract includes a significant financing component, either implicitly or explicitly.

Review Questions

• Explain how the transaction price is determined and how it relates to the revenue recognition principle.
  • The transaction price is the amount of consideration that an entity expects to be entitled to in exchange for transferring promised goods or services to a customer. It represents the monetary value of the transaction and is a key factor in the revenue recognition principle. The revenue recognition principle states that revenue should be recognized when it is earned, regardless of when the cash is received. The transaction price must be allocated to the distinct performance obligations identified in the contract, which represent the unit of account for revenue recognition. Entities must also consider variable consideration and the time value of money when determining the appropriate transaction price.
• Describe the role of variable consideration in the determination of the transaction price and how it is constrained.
  • Variable consideration refers to the portion of the transaction price that is subject to change due to factors such as discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items. Variable consideration must be included in the transaction price to the extent that it is highly probable a significant reversal in the amount of cumulative revenue recognized will not occur. This process of constraining estimates of variable consideration involves limiting the amount of variable consideration included in the transaction price to the amount for which it is highly probable that a significant reversal will not occur. This ensures that the transaction price reflects the amount of consideration the entity expects to be entitled to, which is a key component of the revenue recognition principle.
• Analyze how the time value of money impacts the determination of the transaction price and the subsequent recognition of revenue.
  • When a contract includes a significant financing component, either implicitly or explicitly, entities must consider the time value of money when determining the transaction price. This is because the timing of the transfer of goods or services to the customer and the timing of the customer's payment can have a significant effect on the amount of consideration to which the entity expects to be entitled. By considering the time value of money, the entity can ensure that the transaction price reflects the cash selling price of the promised goods or services, which is a crucial factor in the proper application of the revenue recognition principle. Failure to account for the time value of money could result in the misstatement of revenue, as the amount recognized would not accurately reflect the economic substance of the transaction.

Related terms

Revenue Recognition Principle:

The revenue recognition principle states that revenue should be recognized when it is earned, regardless of when the cash is received. It ensures that financial statements accurately reflect a company's performance.

Variable Consideration: Variable consideration refers to the portion of the transaction price that is subject to change due to factors such as discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items.

Constraining Estimates of Variable Consideration: Constraining estimates of variable consideration involves limiting the amount of variable consideration included in the transaction price to the amount for which it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur.