Subtopics

ASC 705 contains two subtopics:

• ASC 705-10, Overall, which merely links to guidance in other Codification topics on costs of sales and services.
• ASC 705-20, Accounting for Consideration Received from a Vendor.

ASC 705-20, Accounting for Consideration Received from a Vendor

In some arrangements, an entity may receive consideration from a vendor. The consideration may be in the form of cash, credit, coupons, etc. This consideration should be accounted for by reducing the purchase price of goods or services acquired from the vendor, except if it is received:

• In exchange for a distinct good or service transferred to the vendor. In this case, the consideration should be accounted for in the same manner as other revenue from contracts with customers. The entity must look to the standalone selling price of the good or service transferred. If the amount of consideration received from the vendor is greater than the standalone selling price, the excess should be accounted for as a reduction of the purchase price of any goods purchased from the vendor. (ASC 705-20-25-02)
• As a reimbursement of costs incurred to sell the vendor's products. The consideration should represent a reduction of these costs and be specific, identifiable, and incremental. If the amount of the reimbursement is greater than the cost, the excess should be accounted for as a reduction of cost of sales. (ASC 705-20-25-03)
• As consideration for sales incentives offered to customers by manufacturers. These may be in the form of coupons or rebates offered to the end buyer by the manufacturer.

  (ASC 705-20-25-01)

In order to exercise the last exception, the sales incentives must meet all of the following criteria:

• The consumer can use the incentive at any reseller.
• The vendor reimburses the reseller directly based on the face amount of the incentive.
• The time of the reseller's reimbursement is determined only by the terms of the customer's incentive.
• The reseller is an agent of the vendor in the incentive transaction between vendor and customer.

  (ASC 705-20-25-05)

If an entity meets these criteria, it should account for the transaction based on the guidance for revenues from contract with customers. If the criteria are not met, the incentive is a reduction of the purchase price of goods or services acquired from the vendor. (ASC 705-20-25-05)

The entity's ability to estimate the amount of future rebates or refunds may be hampered by the following:

• The rebate or refund relates to purchases that will occur over a relatively long period.
• The entity has no historical experience with similar products.
• The entity is not able to apply historical experience because circumstances have changed.
• In the past, the entity had to make significant adjustments to expected cash rebates or refunds.
• The product is susceptible to technological obsolescence, changes in demand, or other significant external factors.

  (ASC 705-20-25-11)

A change in estimate is recognized using cumulative catch-up adjustment.