Noncash Consideration

In most business transactions, an entity receives cash in exchange for providing goods or services. However, many entities trade their goods or services for noncash consideration. Noncash consideration can take a variety of forms including land, promised services, inventory, PP&E, and intangible assets. Equity instruments, such as stock, are the most common type of noncash consideration.

The purpose of this article is to analyze key accounting issues that arise under Accounting Standards Codification (ASC) 606 when recognizing revenue from transactions involving noncash consideration. These transactions mainly affect the third step of ASC 606, which is to determine the transaction price.

How and When to Measure Noncash Consideration

An entity that accepts noncash consideration in a revenue transaction follows the first two steps of the five-step method in the same manner as it would with cash consideration; the entity identifies the contract with the customer and then identifies the performance obligations. The third step—determining the transaction price—is where the nature of consideration has more of an impact on the entity’s approach to revenue recognition. For information about the other steps of the revenue recognition model, read The Five Step Method.

The transaction price is the consideration an entity expects to receive in exchange for goods or services and is recognized at the fair value amount of that consideration. When a customer pays with noncash consideration, the fair value of that consideration may not be as clear as a cash payment. In some cases, more judgment will be needed to determine the fair value of consideration offered. For example, the fair value of publicly traded stock would be easier to determine than that of equipment or an intangible asset. If an entity cannot reasonably determine the fair value, the standalone selling price of the goods or services promised to the customer is considered the transaction price (ASC 606-10-32-21 through 32-22). Read more about Standalone Selling Prices in ASC 606.

The measurement date for determining the fair value of noncash consideration to be received from a customer is the date of contract inception, rather than the date when the noncash consideration is received or earned. The date of contract inception is the day that the criteria in ASC 606-10-25-1 are met (ASC 606-10-32-21). Read more about these criteria in Identify the Contract.

Denny's Corporation (2019 SEC Correspondence): Noncash Consideration Measurement

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In 2019, the SEC asked Denny’s Corporation to provide more information about the “valuation technique(s) and inputs used in the fair value measurement” of noncash consideration received in exchange for real estate. Denny’s responded with the following explanation (August 2019 letter to the SEC):

In addition to the cash proceeds received on the sale of real estate during the first quarter, we also recorded additional noncash consideration for the fair value of restaurant space we expect to receive within a building being developed by the buyer of the real estate. The fair value of this space was determined using a market approach with Level 2 inputs based on third party appraisals of fair values of other similar properties. The $3.0 million of noncash consideration is recorded as a component of other noncurrent assets in our Condensed Consolidated Balance Sheets.

Noncash Consideration with a Variable Fair Value

Noncash consideration with a variable fair value may be considered variable consideration. If so, the entity would be required to follow the guidance of ASC 606-10-32-5 through 32-14 to estimate the amount of consideration it will receive.

If noncash consideration is variable only due to the form of the consideration, it is not considered variable consideration. For example, if the consideration is in the form of stock options or stock, which is inherently variable in its value, the consideration would not be considered variable. In contrast, the consideration would qualify as variable consideration if the noncash consideration (e.g. the number of stock options it will receive) is variable because the amount is based on another factor, such as a performance measure (ASC 606-10-32-23).

In some cases, the noncash consideration may be variable for multiple reasons. In these situations, the guidance on variable consideration should be applied only to the variability related to factors other than the form of consideration (ASC 606-10-32-23). To learn more, read Variable Consideration and the Constraint.

Example A: Noncash Consideration—Variable Due To Form

Example B: Noncash Consideration—Variable Due To Form And Reasons Other Than Form

Consider a case where Entity A enters a contract with Company B to perform consulting services that would normally be valued at $51,000. Entity A determines that the service is a single performance obligation. Instead of receiving cash from Company B, Entity A agrees to be paid in stock options of Company B. Both accept the contract on Jan. 1, 2020, when the stock options are valued at $50 a share.

If Entity A completes its work by Apr. 1, 2020, it will receive 1020 stock options. However, if Entity A finishes its work before Mar. 1, 2020, it will receive an additional 100 stock options (1120 stock options total). On Jan. 1, 2020, Entity A determines that there is a 20% chance it will complete its work before Mar. 1, 2020. However, on Feb. 1, 2020, Entity A determines that there is a 95% chance it will complete its work before Mar. 1, 2020. Entity A uses the most likely amount method for variable consideration in similar situations.

On Feb. 15, 2020, Entity A completes the services, and stock options are valued at $52 each. Company B gives Entity A the stock options on Mar. 1, 2020, when stock options are valued at $46 each.

Issue: On what day is the noncash consideration measured? Is the noncash consideration remeasured on any later dates?

Analysis: In this example, the fair value of the noncash consideration could change as a result of 1) the form of the stock options and 2) reasons other than its form. Stock options naturally fluctuate in value due to their form, and the fair value of the consideration also varies based on the day Entity A completes its work. The guidance on variable consideration (ASC 606-10-32-5 through 32-14) should only be applied to the variability resulting from reasons other than the form of the consideration (ASC 606-10-32-23). Thus, any changes in the fair value of individual stock options should not affect the transaction price. Only the variability based on the day Entity A completes its work will affect the transaction price.

Entity A measures the noncash consideration (stock options of Company B) at its fair value on the contract inception date of Jan. 1, 2014. Entity A determines that at contract inception date, the transaction price is $51,000 ($50 x 1020) since it is most likely that it will complete its work by Apr. 1, 2020, but after Mar. 1, 2020. On Feb. 1, 2020, Entity A determines that there is a 95% chance it will complete its work before Mar. 1, 2020. Entity A would now determine the transaction price to be $56,000 ($50 x 1120) using the value of the stock options at contract inception because it expects to receive an additional 100 stock options. Entity A should record the difference of $5,000 ($56,000 – $51,000) and ignore any changes in the price of the stock options.

Customer Contributions as Noncash Consideration

Oftentimes, a customer contributes goods or services to help complete a contract. In such cases, the entity determines whether it retains control of those goods or services after the contract is completed. If the entity retains control, those goods or services are accounted for as noncash consideration. For example, assume that a customer contributes specific supplies to a manufacturer to complete a contract. If the manufacturer uses the supplies to complete the customer’s order and receives no additional benefit, those supplies are not considered noncash consideration. However, if the manufacturer has some of those supplies left over after fulfilling its contract with the customer, and uses those supplies on other contracts, the leftover supplies would be accounted for as noncash consideration (ASC 606-10-32-24).

Conclusion

Under the five-step revenue recognition model in ASC 606, entities should exercise judgment when determining the transaction price for contracts involving noncash consideration. Noncash consideration is measured on the date of contract inception at its fair value. If fair value is not determinable, the standalone selling price of the goods or services should be used. Entities should follow the guidance for variable consideration if the amount of noncash consideration will vary due to reasons other than its form. Customer contributions towards the completion of the contract may also represent noncash consideration under certain circumstances.

Resources Consulted

ASC 606-10-32-21 to 32-24, 55-248 to 55-250
ASU 2016-12: “Revenue from Contracts with Customers.” BC 36-BC43.
EY, “Revenue from Contracts with Customers (ASC 606).” January 2020. Section 5.6
Deloitte, “A Roadmap to Applying the New Revenue Recognition Standard.” July 2019. Section 6.4.