Transaction price
The transaction price is the consideration an entity expects to be entitled to in exchange for transferring promised goods or services, excluding amounts collected on behalf of third parties such as some sales taxes. It reflects variable consideration, significant financing components, non-cash consideration and consideration payable to the customer.
Standard references
- ASC 606606-10-32-2 to 32-27 (32-2A: election to exclude sales taxes)
- IFRS 15paragraphs 47–72
- Ind AS 115paragraphs 47–72
Worked example
Illustrative: a non-cancellable three-year contract at $40,000 a year, a $10,000 implementation fee, and a $5,000 marketing credit the vendor pays to the customer. Overage fees could also apply, but usage is highly uncertain.
- Fixed consideration: 3 × $40,000 + $10,000 = $130,000.
- Consideration payable to the customer reduces the price: $130,000 − $5,000 = $125,000.
- Overage fees are variable consideration. Given the uncertainty, the constrained estimate is $0 at inception, reassessed each period.
Result: Transaction price at inception: $125,000.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Starting from the invoice total including tax.
- Ignoring credits, rebates or other amounts payable to the customer.
- Including consideration for periods the customer can cancel without substantive penalty, which are outside the enforceable contract.