The Financial Accounting Standards Board issued a proposed Accounting Standards Update on Thursday that would clarify when payments made on behalf of a customer, or to a customer of an entity’s customer, should be accounted for as consideration payable to a customer under the revenue recognition standard.
“For example, payments to a customer of an entity’s customer may arise when a platform provides credits, rebates, or discounts directly to end users to encourage purchases from sellers that are the platform’s customers, and payments made on behalf of a customer may arise when a retailer pays a third-party bank to enable its customer to obtain interest-free financing for a qualifying purchase,” the proposed ASU says.
Under Topic 606, Revenue from Contracts with Customers, consideration payable to a customer is accounted for as a reduction of the transaction price and, therefore, of revenue unless the payment is in exchange for a distinct good or service provided by the customer.
However, Topic 606 doesn’t explicitly address when payments made to parties outside the direct distribution chain, such as those that don’t purchase the entity’s goods or services either directly from the entity or indirectly through the entity’s customer, are consideration payable to a customer. As a result, companies may account for similar payments differently, resulting in diversity in practice, the FASB says.
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The proposed amendments would clarify that payments made on behalf of a customer, or to a customer of an entity’s customer, should be consideration payable to a customer when made in connection with the entity satisfying its promise to the customer if either:
- The entity has explicitly promised to make the payment, or
- The customer has a reasonable expectation that the entity will make the payment because the entity has implicitly promised to do so or the payment represents an in-substance price concession.
The proposal would apply to all companies and other organizations that make these payments in connection with a revenue contract accounted for under Topic 606. The proposed amendments wouldn’t otherwise affect the existing guidance on consideration payable to a customer, including determining whether consideration payable to a customer is in exchange for a distinct good or service, the FASB says.
In addition, the amendments in the proposed ASU would:
- Improve the decision usefulness of financial reporting information by promoting more consistent accounting for economically similar payments;
- Reduce diversity in practice by clarifying when payments should be accounted for as consideration payable to a customer under Topic 606; and
- Reduce the cost and complexity of applying current GAAP by providing a clearer framework for evaluating those payments.
The proposed ASU is based on a recommendation of the Emerging Issues Task Force, a panel that assists the FASB in improving financial reporting through the identification, discussion, and resolution of financial accounting issues within the framework of the Accounting Standards Codification.
Stakeholders are asked to review and comment on the proposal by Nov. 23, 2026.
Photo credit: Financial Accounting Standards Board
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