Home
Step 3: Transaction Price

Consideration Payable to a Customer

Analysis of ASC 606's treatment of payments paid to customers, including the payment types and the timing of recognizing a reduction in revenue.

Jace Chambers
Hallie Anderson
Published:
Apr 1, 2016
Updated:
Oct 10, 2026

Entities often make payments to their customers for a variety of reasons. Often, these payments relate to the sales transaction from an entity to the customer. In other cases, the entity may purchase goods or services from one of its customers. Common examples of consideration payable to a customer include slotting fees, cooperative advertising, buydowns, price protection, coupons, rebates, and similar incentives.

The key accounting question here is whether a payment made to a customer should be accounted for as a reduction of revenue or as a regular purchase from a vendor (typically recorded as an expense).

ASC 606 provides a principles-based framework for evaluating consideration payable to a customer and determining the appropriate financial statement presentation.

How To

This analysis is performed in Step 3—Determine the Transaction Price—of ASC 606’s five-step model.

Guidance on this subject can be found in ASC 606-10-32 paragraphs 32-25 through 32-27, with additional guidance for share-based consideration in ASC 606-10-32-25A.

Under ASC 606-10-32-25, consideration payable to a customer includes:

  1. Cash amounts that an entity pays, or expects to pay, to a customer (or to other parties that purchase the entity’s goods or services from the customer).
  2. Credits or other items, such as coupons or vouchers, that can be applied against amounts owed to the entity (or to other parties who purchase the entity’s goods or services from the customer).
  3. Share-based consideration, including equity- or liability-classified instruments granted to a customer (or to other parties that purchase the grantor’s goods or services from the customer) in conjunction with selling goods or services. (Instruments include shares, share options, cash-settled stock appreciation rights, and warrants. See Topic 718 for more examples.) The grantee, in its role as a customer, is not required to be a supplier of goods or services to the grantor.

Consideration payable to a customer is generally accounted for as a reduction of the transaction price (and therefore revenue) unless the payment is in exchange for a distinct good or service that the customer transfers to the entity.

Four Key Questions in the Analysis

When evaluating consideration payable to a customer, entities should consider the following questions:

  1. Does the payment fall into the scope of ASC 606-10-32-25?

The payment must be made to a customer or to another party in the distribution chain that purchases the entity’s goods or services from the customer. For example, a retail partner and, in certain arrangements, an end consumer within the distribution chain may be considered within the scope of the guidance. The term “payment” includes equity instruments and credits or other items that can be used by the customer to offset the amount owed to the entity, in addition to cash consideration.

Distribution Chain Considerations

The guidance on consideration payable to a customer generally applies to customers and other parties within the distribution chain. However, entities must evaluate substance over form, particularly in principal-agent arrangements or when payments are economically linked to customer contracts.

  1. Does the entity receive a distinct good or service in exchange for the consideration payable?

If the entity does not receive a distinct good or service, the amount payable to the customer should be a reduction of the transaction price of the related revenue contract. Companies should consider whether the same benefit could have been acquired from a party that does not purchase the company’s goods or services.

For example, assume an entity gives its retail partner a discount if the retail partner provides space for the entity’s goods on its shelves. This service is of no value to the entity if the retailer is not selling the entity’s goods. Thus, the entity should conclude that it is not receiving a distinct service and should account for the payment to the customer as a reduction of the transaction price. See Distinct Goods or Services in ASC 606 and ASC 606-10-25-18 through 25-22 for more information.

  1. Can the fair value of the distinct good or service be reasonably estimated?

If fair value cannot be reasonably estimated, the entire amount of consideration payable reduces revenue. The entity must be able to reasonably estimate the fair value of that good or service for the consideration payable to be ignored as a reduction of the sales price.

  1. Is the consideration payable higher than the fair value of the distinct good or service received?

If a distinct good or service is identified, the amount accounted for as a purchase (expense) is limited to the fair value of that good or service. Any consideration payable in excess of fair value must be recorded as a reduction of revenue. Fair value must be determined independently and cannot simply equal the contractual payment amount.

The following figure illustrates the process an entity should go through to account for consideration payable to a customer.

Consideration Payable to a Customer — illustration

Example: Shelf Space Arrangement

A consumer goods manufacturer enters into a one-year contract to sell goods to a large retail company. The retail customer has agreed to a $250,000 minimum purchase commitment throughout the year. The contract also requires the manufacturer to make a nonrefundable payment of $25,000 to the retail customer at the inception of the contract. The $25,000 payment will compensate the retail customer for the changes it needs to make to its shelving to accommodate the manufacturer’s products.

The manufacturer concludes that the payment is not in exchange for a distinct good or service because:

  • The manufacturer does not obtain control of shelf space as a separable service, and
  • The shelving modification has no value absent the underlying sales relationship.

Accordingly, the $25,000 payment is accounted for as a reduction of the transaction price, allocated proportionately as revenue is recognized (when the goods are transferred). Consequently, as the entity transfers goods to the customer, the entity reduces the transaction price for each good by 10 percent ($25,000 ÷ $250,000). (Adapted from ASC 606-10-55-252 through 55-254)

Timing of Revenue Reduction

ASC 606-10-32-27 requires that a reduction of revenue for consideration payable to a customer be recognized at the later date of:

  • when the related revenue is recognized, or
  • when the entity pays or promises to pay the consideration.

Consideration payable often represents variable consideration and therefore must also be evaluated under the variable consideration guidance in ASC 606-10-32-5 through 32-13, including application of the constraint.

If an entity has a history of providing similar incentives, the consideration may be implicitly promised at contract inception, requiring an immediate reduction of the transaction price.

Prior U.S. GAAP generally presumed that consideration payable to a customer was a reduction of revenue unless an identifiable benefit could be demonstrated. ASC 606 replaced this presumption with a principles-based framework focused on whether a distinct good or service is received, aligning the analysis with the broader performance obligation model.

Share-Based Consideration Payable to a Customer

ASC 606 explicitly includes share-based consideration granted to customers in conjunction with selling goods or services within the scope of consideration payable to a customer.

Under ASC 606-10-32-25A:

  • Share-based consideration is measured and classified under Topic 718.
  • The grant-date fair value of the award determines the amount treated as consideration payable to a customer.
  • The grant-date fair value is used to determine whether the award represents:
    • payment for a distinct good or service (expense), or
    • a reduction of revenue.

Importantly, subsequent changes in fair value of liability-classified awards do not adjust revenue. Those changes are recognized elsewhere in the income statement in accordance with Topic 718.

Share-based consideration is measured at grant-date fair value and is not subsequently adjusted through revenue under the variable consideration guidance.

Conclusion

Consideration payable to a customer remains an area requiring careful judgment under ASC 606. While the core principles have remained consistent since adoption, recent standard-setting has clarified the measurement and presentation of share-based consideration payable to customers.

Entities most affected by this guidance include those that:

  • sell through distribution channels,
  • offer flexible pricing or promotional arrangements, or
  • grant equity instruments to customers as part of commercial arrangements.

Applying a disciplined, contract-specific analysis remains critical to ensuring appropriate revenue recognition and financial statement presentation.

Editor's Note:

This guidance was originally published in 2016 and has been updated to reflect current ASC 606 standards, including clarifications on share-based consideration payable to customers. The update incorporates recent interpretations and best practices to ensure the analysis aligns with the latest principles-based framework for revenue recognition. Users should rely on this version for current accounting and reporting considerations.

Resources Consulted

Footnotes
Jace Chambers
Hallie Anderson
Apr 1, 2016