Price Concessions in ASC 606

In some cases, an entity may accept a lower price than what was originally stated in the contract. This situation could occur because the entity wants to encourage the customer to keep making purchases, because the entity is trying to gain market share, or because the customer has expressed dissatisfaction with the goods. Under ASC 606, accepting a lower price is a common form of variable consideration known as a price concession.

This article explains how price concessions are identified and accounted for based on customer expectations or an entity’s intent and provides illustrative examples and real-company applications.

Price Concessions Scenarios Under ASC 606

While other forms of variable consideration, like bonuses or penalties, may be explicitly stated in the contract, price concessions are frequently implied or assumed. ASC 606-10-32-7 outlines two price concession scenarios that constitute variable consideration:

Customer Expectation. Past business practices or public statements lead the customer to expect a discount. The customer expects a price concession because of the entity’s “customary business practices, published policies, or specific statements” (ASC 606-10-32-7(a)).
Entity Intent. The specific facts and circumstances indicate the seller intends to offer a reduction.

If the customer has a valid expectation of a price concession, then the entity should apply the variable consideration guidance and reduce the transaction price to reflect the amount of consideration actually expected to be received.

In practice, a concession may be referred to using different names, such as a discount, rebate, refund, or credit.

Example 1: Customer Expectation

Company X sells 2,000 computers for $500 each to Customer Y, a new customer, for a total transaction price of $1,000,000. Historically, Company X has granted 30% discounts to new accounts. Because of Company X’s customary business practices, Customer Y expects that the entity will offer a price concession. Based on its historical treatment of new customers, Company X determines that it is willing to accept a total transaction price of $700,000 for the 2,000 computers sold to new Customer Y.

Analysis: Because Company X will likely provide a price concession and accept a price lower than $1,000,000, the consideration is variable. Company X expects to be entitled to $700,000, and this amount is not constrained because it is probable that a significant reversal of cumulative revenue recognized will not occur. Company X, therefore, should adjust the transaction price down to the expected amount of $700,000.

GTT Communications, Inc. (April 2020 SEC Correspondence): Price Concession Determination

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GTT Communications, a telecom and internet service provider, entered into correspondence with the SEC about the treatment of variable consideration in its contracts. In this conversation, GTT offered an analysis of its consideration of price concessions.

In certain instances, a customer may seek to renegotiate its contract with the Company when or if it incurs usage-based fees. The modified contracts provide for new distinct services that are offered at the then-current standalone selling price. These modifications would therefore be treated as a termination of the existing contract and the creation of a new contract, in which case revenue would be adjusted prospectively for the terms of the new contract. These modifications would not be considered a concession by the Company. The Company has no history of issuing price concessions or entering into other arrangements that would change the payment terms of its usage-based contracts. Therefore, the Company has concluded that this criterion does not exist (April 2020).

Because the company recognizes a new contract each time it renegotiates fees with its customers, GTT does not recognize price concessions. Instead, GTT has created a new contract with terms that meet the needs of its customers.

The Critical Distinction: Price Concession vs. Impairment

The facts and circumstances of a given transaction must be carefully considered because it can be difficult to distinguish between an implicit price concession (Step 3 of ASC 606) and an impairment/credit loss (ASC 326). These “facts and circumstances” (ASC 606-10-32-7) may include the customer’s ability to continue as a going concern, customer cash flow problems, customers entering a new region with a poor local economy, high competition in the market, or the customer’s limited experience.

This distinction becomes particularly important when expectations about collectibility change after contract inception. As noted by EY in its Financial Reporting Developments: Revenue from Contracts with Customers (ASC 606):

Entities may also need to apply judgment when determining whether a change in the amount it expects to collect after contract inception is due to a change in an estimate of variable consideration (and, therefore, should be accounted for as a change in the transaction price) or due to a change in estimated credit losses that would be accounted for as credit loss expense.

In other words, entities must determine whether the change reflects a pricing decision or a deterioration in credit risk.

A price concession is a strategic decision to accept less money to enhance a relationship or market position. This reduces revenue. An impairment (Credit) Loss is a result of the customer’s inability to pay (credit risk). This is recorded as Bad Debt Expense, not a reduction in revenue.

Accordingly, entities must apply judgment based on the specific facts and circumstances of each transaction. Common factors to consider when determining if something is a price concession or impairment are displayed in the table below.

Factor	Price Concession (ASC 606)	Credit Loss (ASC 326)
Timing	Identified at or near inception	Usually identified after inception
Reason	Market share, relationship, dissatisfaction	Customer’s inability to pay
Financial Statement Impact	Reduces Revenue	Increases Operating Expenses (Bad Debt)

See ASC 606 and ASC 326 (CECL) for more information on the difference between ASC 606 and ASC 326.

Misonix, Inc. (2019 SEC Correspondence): Royalty Price Concessions

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Misonix Inc. is a medical production company focusing on ultrasonic instruments and tools. Misonix sold a license to Hunan Xing Hang Rui Kang Bio-technologies Co., Ltd. that would allow Hunan to produce and distribute Misonix’s SonaStar product line in China, Hong Kong, and Macau, and pay Misonix through royalty fees. The SEC posted questions about the certainty of the price concessions in the royalty contract. Misonix provided an analysis of the factors used to evaluate the price concession (July 2019):

The ability for Hunan to have a viable revenue stream in order to pay minimum royalties is subject to Hunan building a factory to produce SonaStar and obtaining Chinese FDA approval to manufacture and distribute the Product.
The manufacture of the SonaStar product will be the first manufacturing venture by Hunan in the company’s history. This adds an additional element of risk to its ability to successfully manufacture and sell the product and generate sufficient cash flow to satisfy royalties due to Misonix.
Misonix believes that if Hunan defaults under the agreement, Misonix may not be able to successfully recover stated minimum royalties due to the uncertainty surrounding the legal and regulatory framework in China and Misonix’s limited dealings with China.
The technology and license on this product that was sold to Hunan may not be as valuable to Misonix due to the ongoing R&D related to new technology.

Based upon these factors, Misonix used the most-likely method of determining variable consideration on the minimum royalties and determined the value of estimated license revenue and a corresponding contract asset to be $960,000. This makes up about one-sixth of the total estimated price concession of $6,000,000.

Example 2: Implicit Price Concession

Toy Maker Inc. signed a contract to purchase $300,000 of plastic from Plastic Company to produce children’s toys. Although the company has had negative cash flows during its first two years of operations, it expects growth and is forecasting positive cash flows and net income by Year 4.

Plastic Company intends to offer Toy Maker a price reduction in order to maintain the supply relationship. Plastic Company knows that Toy Maker might not be able to afford the full $300,000 price now, but Plastic Company wants to forge this relationship to obtain more business in the coming years. As a result, Plastic Company reduces the transaction price to $100,000. Is this adjustment an implicit price concession or an impairment loss?

Analysis: This adjustment is an implicit price concession. Plastic Company is offering this price concession for the purpose of forming and keeping a customer relationship alive. Positive forecasts for Toy Maker give Plastic Company confidence that Toy Maker will enter into future contracts with Plastic Company. Although Toy Maker’s operations are currently cash flow negative, Plastic Company offers a reduction in price because the facts and circumstances of the transaction lead it to believe that Toy Maker will be a profitable company in the future. Consequently, Plastic Company should account for the price reduction as a price concession rather than an impairment loss.

Hanger, Inc. (January 2020 SEC Correspondence): Price Concession Disclosure

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Hanger Inc. is a prosthetics and physical health company founded about 150 years ago. The company entered into correspondence with the SEC to deliver more information on how the company disclosed and accounted for its price concessions. Hanger explained to the SEC how it accounts for price concessions and why it deems them important enough to disclose (January 2020).

Implicit price concessions reflect variable consideration and represent the difference between contractual amounts billed and amounts we expect to collect based on our settlement experience pertaining to similar claims. We follow the guidance set forth in ASC 606-10-32-5 through ASC 606-10-32-9, which requires that we estimate these concessions in the determination of the transaction price. We apply the expected value method to estimate these concessions, and the resulting amounts are recorded as a reduction to gross charges with a corresponding reduction to billed accounts receivable. Given that our estimates of implicit price concessions pertaining to a current period relate to the amount we expect that we will not ultimately realize upon settlement in a future period, an accumulated balance arises which reflects the aggregate portion of our billed accounts receivable that we do not expect to ultimately realize.

With respect to the Staff’s question regarding our reasons for providing this additional disclosure, given that the accumulated balances of implicit price concessions reflect a significant estimate, we believe that disclosure of the amounts of these balances provides meaningful insight to investors regarding the composition of accounts receivable, in that changes in the estimated balances of billings which the Company expects it will not realize can be distinguished from the gross billings themselves. While the literature does not address this disclosure, given the magnitude of the accumulated balance (which amounted to 33% of billed accounts receivable within the Patient Care segment on December 31, 2018), we believe that disclosure of these amounts is meaningful and not prohibited.

In summary, Hanger concluded that these amounts represent implicit price concessions reflecting expected settlement outcomes, rather than credit losses, and therefore reduced revenue and accounts receivable at contract inception in accordance with ASC 606.

Example 3: Impairment Loss

Furniture Company enters into a contract with Lumber Company to buy $300,000 of wood to make specialty cabinets. Furniture Company is experiencing economic difficulties and has some cash flow problems. Because of the heightened competition in the local furniture industry, Furniture Company is struggling to survive.

Based on the credit risk of Furniture Company, Lumber Company determines that it might only receive $250,000 from Furniture Company. This revised determination is made after contract inception. Lumber Company is willing to accept this credit risk because Lumber Company would have sufficient margin on the sale of wood to cover the risk of loss. Lumber Company has not offered price concessions to furniture companies in the past. Is this adjustment an implicit price concession or an impairment loss?

Analysis: This price adjustment is an impairment loss under ASC 326. In this situation, Lumber Company has analyzed the credit risks of Furniture Company and is collecting the highest amount of consideration that it can from Furniture Company. Lumber Company does not expect Furniture Company to continue as a going concern in the foreseeable future. Lumber Company would not normally offer such a concession, but due to the unique facts and circumstances of this situation, it must recognize a credit loss under ASC 326 through bad debt expense, rather than reducing revenue. See ASC 606 and ASC 326 (CECL) for more information on the difference between ASC 606 and ASC 326.

As an entity considers the possibility of impairment loss, it must also consider the probability of collecting the consideration. If it is not probable that the entity will collect the consideration to which it is entitled, the transaction does not meet the criteria for a contract with a customer found in ASC 606-10-25-1. For instance, in Example #2, if Plastic Company determined that it was not probable that the entity would collect the reduced price of $100,000 from Toy Maker Inc., a contract would not exist, and Plastic Company could not account for the transaction as a sale under ASC 606. (For more information on differentiating between a price concession and an uncollectible amount, see Collectibility.)

Conclusion

Entities must determine whether they intend to offer a price concession or whether the customer has a valid expectation of one based on past practices or stated policies. Entities must also consider relevant facts and circumstances—such as customer cash flow constraints, economic conditions, and competitive pressures—when evaluating whether consideration is variable under ASC 606.

If an explicit or implicit price concession exists, the consideration is variable, and the transaction price must be reduced to the amount the entity expects to be entitled to. However, if a reduction in expected consideration results from the customer’s inability to pay rather than a pricing decision, the adjustment represents a credit loss and must be accounted for under ASC 326, rather than as a reduction of revenue. Accordingly, careful judgment is required to distinguish between pricing decisions and credit risk when applying U.S. GAAP.

Editor’s Note

This article was originally published in December 2020 and has been updated to align with current accounting guidance and terminology. While the SEC correspondence referenced predates recent economic cycles, the accounting conclusions remain consistent with current U.S. GAAP.

Resources Consulted

ASC 606-10-25-1, 32-7, 55-99 to 55-101
ASC 326
EY, Financial Reporting Developments: “Revenue from Contracts with Customers.” August 2025. Section 5.2.1.
KPMG, Handbook: “Revenue Recognition.” Dec 2025. Section 5.3.1.
PWC, “Revenue from contracts with customers.” October 2024. Section 4.3.3.1.
FASB, Board Meeting Handout: “Post-Implementation Review of Topic 326, Financial Instruments—Credit Losses.” December 2, 2020.