Volume discounts are a common form of variable consideration found in purchase contracts today. These volume discounts are commonly provided through hierarchical pricing (incrementally lower purchase prices at predefined thresholds for additional purchases), retrospective refunds (partial refunds for earlier purchases once a threshold is reached), and percentage discount vouchers. Volume discounts are designed to promote larger purchases and continued relationships with customers. Many entities will have to consider this topic to determine the appropriate approach to recognizing revenue under the new standard.
Volume Discount Considerations Under ASC 606
Volume discounts are one type of variable consideration referenced in Accounting Standards Codification (ASC) 606-10-32-7. Please refer to Variable Consideration and Constraint for additional information on accounting for contracts containing variable consideration components. In certain circumstances, volume discounts may be considered a customer option, per ASC 606-10-55-41. Please refer to Customer Options for Additional Goods or Services for additional insights on customer options. This article will summarize relevant guidance, and then examine several examples of volume discounts and the appropriate treatment.
Variable Consideration and the Constraint
In estimating the transaction price for a volume discount, an entity should first estimate the total units expected to be sold. After unit volume has been estimated, an entity will then calculate the estimated average selling price per unit based on the schedule of discounts in the contract. Revenue is recognized at the average estimated selling price, and the remainder of any payment beyond this price is recorded as a contract liability. Subsequent sales below the estimated selling price (or retrospective refunds) reduce this liability. Similar to other transactions, revenue in a contract with volume discounts should only be recognized to the extent it is probable (a high likelihood, or about 75-80 percent) that a significant reversal will not occur. At all times revenue should be recognized for at least the minimum price. If the estimated transaction price changes (due to changes in volume) during the contract period, this change should be allocated across all performance obligations–satisfied or otherwise–with a corresponding increase or decrease to revenue in the period of the change.
Customer Options for Additional Goods or Services
In accordance with ASC 606-10-55-42, a volume discount contains a material right if the customer receives a significant discount that would not be available without entering into the contract. If volume discounts contain a material right, then a separate performance obligation exists and the entity would be required to allocate a portion of the transaction price to the customer option performance obligation. The portion of the transaction price allocated to this additional performance obligation will be deferred and recognized as the future goods are provided or as the option expires.
Entities that provide volume discounts are required under ASC 606 to estimate total sales volume, and then calculate an average selling price per unit. Revenue is recognized at the estimated selling price, with any excess payment recorded as a contract liability. Subsequent sales below the estimated price (and retrospective refunds) will reduce this liability. If a volume discount constitutes a material right, the discount is a separate performance obligation. As with all variable consideration, entities should also consider the constraint on revenue recognition.
- Deloitte: “A Roadmap to Applying the New Revenue Recognition Standard.” November 2021.
- PwC: “Revenue from Contracts with Customers.” February 2022.