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Revenue Impacting contract Terms: Rate Card / Renewal Pricing Guarantee

As a continuation of our series on revenue impacting contract terms, we will do a deep dive on Rate Cards and Renewal Pricing Guarantee language. When a contract with a customer includes a material option to purchase additional goods or services in the future, the option represents a performance obligation. The right is considered material if the company would not have received the same optional pricing if they wouldn’t have signed the contract. Another way of saying this is if the optional discount is higher than what a similarly situated customer would be offered in another circumstance, the right is material. The language in the guidance is vague and does not give a bright line on what constitutes a material right. Therefore, assessment of the potential material right is subject to the professional judgement of those preparing a company’s financial statements. One additional thing to note is that if the optional purchase represents the standalone selling price of the product, no material right exists.

Contract Clause Example 1 (Rate Card): During the Subscription Term, Customer may purchase additional products at the prices listed in the table below.

Assessment Example 1:

There are many things to consider in assessing this contract clause for a material right. There is an option to purchase a set number of additional products at a discounted price.

The Wecksell product is being offered at a 70% discount. Let’s assume that the standalone selling price for Wecksell is 40% discount, and the customer’s current contract discount is 40%. No other customers that are similarly situated to this customer have received a 70% discount.

The Sourpoint product is being offered at a 5% discount. Let’s assume that the standalone selling price for Sourpoint is 5% and the customer’s current contract discount is 5%. There are 5 other similarly situated customers that also receive a 5% discount for this product.

Revenue Accounting Conclusion Example 1:

In this example, we conclude that the option to purchase Wecksell at a 70% discount is a material right and fees associated with the current contract must be allocated to this performance obligation. Contrarily, we conclude that the option to purchase Sourpoint at a 5% discount is not a material right, and no additional performance obligation exists.

Contract Clause Example 2 (Price Guarantee): Customer may purchase additional units of the Software at the prices listed in this Order Form on or before the date of expiration.

Assessment Example 2:

The assessment for Example 2 is simple. Assuming that the pricing being offered for the purchase of additional units is the same as what is being purchased under the contract, there is no material right.

Revenue Accounting Conclusion Example 2:

There is no material right, therefore no additional performance obligation exists, and no consideration is to be allocated to the option.

Example 3 (Renewal Price Guarantee): Upon each subsequent renewal, the prices listed in this Order Form shall not increase by more than 5% over the previous subscription period.

Assessment Example 3:

The assessment for Example 3 is also simple. Being that the optional renewal pricing has a floor that is equal to the current contract price or 5% above, the pricing cannot go below what was originally offered.

Revenue Accounting Conclusion Example 3:

There is no material right, therefore no additional performance obligation exists, and no consideration is to be allocated to the option.

Up Next

Stay tuned for our next post: Early Cancellation Rights and Refunds

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