- Is the discounted product currently being sold in the marketplace, or is it a product under development that will be sold in the future? If the discounted product currently is sold in the marketplace at its normal, undiscounted selling price or is under development, that may indicate that the discounted product is a negotiated element of the current arrangement rather than a marketing strategy designed by the vendor (i.e., the vendor is giving up current value as opposed to eliminating slow-moving or obsolete inventory).
- Do a large percentage of customers exercise the right to receive the additional product? If a significant percentage of customers exercise the right to receive the additional product, or historically, a significant percentage of customers have exercised the right to receive additional products in similar arrangements, that may indicate that the discounted product is a negotiated element of the current arrangement and, thus, should be considered an additional element of the arrangement.
- Is the discount a function of the volume of purchases from the vendor? If the discount offered on a product is a funtion of the volume of purchases from the vendor, that may indicate that the arrangement is a marketing strategy similar to a rebate arrangement and, thus, the discounted product would not be considered an additional element of the arrangement. The discount offered is consistent with the discount that was likely to have been affered had the customer purchased the product in a single order.
Accounting for significant incremental discounts - If a software arrangement includes a right to a significant incremental discount on a customer's future purchase of a product(s) or service(s), a proportionate amount of that significant incremental discount should be applied to each element covered by the arrangement based on each element's fair value (VSOE) without regard to the significant incremental discount.
If (a) future product(s) or service(s) to which the discount is to be applied is not specified in the arrangement (for example, a customer is allowed a discount on any future purchases), or (b) the fair value of the future purchases cannot be determined but the maximum amount of the incremental discount on the future purchases is quantifiable, that quantifiable amount should be allocated to the elements of the arrangement and the future purchases assuming that the customer will purchase the minimum amount necessary to utilize the maximum discount.
Example - A software vendor sells Product A for $40 along with a right to a discount (the "coupon") of 50% off list price on any future purchases of its other software products, Products B through Z, with a maximum cumulative discount of $100. VSOE of fair value for Product A is $40 and VSOE of fair value for Products B through Z ranges from $20 to $100. The 50% discount is a significant incremental discount that would not normally be given in comparable transactions.
The vendor should assume that the maximum discount will be utilized. Therefore, the vendor would allocate the $100 discount across Product A and the assumed additional product to be purchased. The overall discount is 41.67% ($100/$240). Therefore, upon the delivery of Product A, the vendor would recognize $23.33 of revenue and defer $16.67. If the customer uses the discount by purchasing additional products with fair value totaling $200, the vendor would recognize $116.67 in revenue upon delivery of those products ($100 in cash received plus the $16.67 previously deferred). If the discount expires unused, the $16.67 in deferred revenue would be recognized at that time.
