Material right
A material right is an option for additional goods or services that the customer would not receive without entering the contract, such as a renewal or add-on discount beyond what that class of customer normally gets. It is a separate performance obligation: part of the price is allocated to it and recognised when the option is exercised or expires.
Standard references
- ASC 606606-10-55-41 to 55-45
- IFRS 15paragraphs B39–B43
- Ind AS 115paragraphs B39–B43
Worked example
Illustrative: a one-year subscription for $50,000 includes an option to renew year 2 for $30,000. New customers pay $50,000 and no comparable discount is offered elsewhere. The vendor expects 80% of customers to renew.
- Option SSP = discount × likelihood of exercise: ($50,000 − $30,000) × 80% = $16,000.
- Sum of SSPs: subscription $50,000 + option $16,000 = $66,000.
- Subscription: $50,000 × 50,000 / 66,000 = $37,878.79. Option: $50,000 × 16,000 / 66,000 = $12,121.21.
- Check: $37,878.79 + $12,121.21 = $50,000.00.
Result: $37,878.79 is recognised over year 1; $12,121.21 is deferred until the renewal is exercised (then recognised over year 2) or lapses.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Treating every renewal option as a material right without comparing it with the discount normally given to that class of customer.
- Missing material rights hidden in price-lock or most-favoured-pricing clauses.
- Leaving the option's allocation deferred after the option has expired.