Significant Financing Component Example Company enters contract with customer to deliver Items A & B for $150,000. Customer pays the $150,000 at inception of contract. Item A will be delivered in 2 years and Item B will be delivered in 5 years. Company determines there are two performance obligations that are each satisfied at a point in time (delivery). The $150,000 transaction price is allocated $37,500 (25%) to Item A and $112,500 (75%) to Item B based on their relative stand-alone selling prices. Company determines the contract has a significant financing component and 6% is the appropriate financing rate. Year 1 accounting Recognize $150,000 liability upon receipt of cash Recognize $9,000 of interest expense at end of year and increase liability balance Year 2 accounting Recognize $9,540 of interest expense at end of year and increase liability balance Recognize $42,135 of revenue upon delivery of Item A at end of year and reduce liability balance Year 3 accounting Recognize $7584 of interest expense at end of year and increase liability balance Year 4 accounting Recognize $8039 of interest expense at end of year and increase liability balance Year 5 accounting Recognize $8522 of interest expense at end of year and increase liability balance Recognize $150,550 of revenue upon delivery of ltem B at end of year and reduce liability balance Significant Financing Component Example Company enters contract with customer to deliver Items A & B for $150,000. Customer pays the $150,000 at inception of contract. Item A will be delivered in 2 years and Item B will be delivered in 5 years. Company determines there are two performance obligations that are each satisfied at a point in time (delivery). The $150,000 transaction price is allocated $37,500 (25%) to Item A and $112,500 (75%) to Item B based on their relative stand-alone selling prices. Company determines the contract has a significant financing component and 6% is the appropriate financing rate. Year 1 accounting Recognize $150,000 liability upon receipt of cash Recognize $9,000 of interest expense at end of year and increase liability balance Year 2 accounting Recognize $9,540 of interest expense at end of year and increase liability balance Recognize $42,135 of revenue upon delivery of Item A at end of year and reduce liability balance Year 3 accounting Recognize $7584 of interest expense at end of year and increase liability balance Year 4 accounting Recognize $8039 of interest expense at end of year and increase liability balance Year 5 accounting Recognize $8522 of interest expense at end of year and increase liability balance Recognize $150,550 of revenue upon delivery of ltem B at end of year and reduce liability balance