In-substance fixed... But variable
Accounting for non-cash consideration denominated in a fixed cash equivalent value
Question: How should changes in the fair value of noncash consideration be accounted for under ASC 606 when a contract is denominated in fiat but payable in tokens, especially if the quantity of tokens depends on the token’s fair value at the time of payment?
Answer: Under ASC 606-10-32-23, changes in the fair value of noncash consideration due solely to the form of the consideration (i.e., fluctuations in the market price of tokens) generally do not result in changes to the transaction price. For example, if a contract specifies payment of 100 native tokens with an inception date price of $8 per token (totaling $800), the transaction price is fixed in fiat terms ($800). If the token price later increases from $8 to $10 per token, the customer would only need to pay 80 tokens to settle the $800 obligation.
Although the quantity of tokens varies, the total payment in dollar terms remains fixed. We can use a term “in-substance fixed variable consideration” to describe consideration in this type of arrangement. While this concept is not explicitly discussed in ASC 606, the guidance provides key principles for handling it.
ASC 606-10-32-23 specifies that changes in the fair value of noncash consideration due to the form of the consideration (such as token price changes) do not affect the transaction price. This means that if the variability in consideration arises solely from token price fluctuations, the revenue recognized remains unchanged. However, if variability arises due to other factors (e.g., the entity's performance), those changes must be included in the transaction price, subject to the constraint on variable consideration.
There are two possible views on how revenue should be recognized in scenarios involving “in-substance fixed variable consideration.”
View 1: Fixed Dollar Amount Approach
Since changes in the token price are purely due to the form of consideration, the total revenue recognized remains fixed at $800, even if the quantity of tokens changes. The variability in the number of tokens delivered is ignored, aligning with ASC 606’s guidance that token price changes do not affect the transaction price. This is the standard interpretation where no variable consideration arises from token price movements.
View 2: Variable Consideration Adjustment Approach
This alternative view suggests that the change in the number of tokens delivered could result in a revenue adjustment. If the token price changes lead to a different token quantity (e.g., from 100 to 80 tokens), the entity should adjust the recognized revenue to reflect this. For instance, applying the original token price of $8 to the reduced quantity of 80 tokens would result in cumulative revenue of $640, rather than the initial $800:
$800.00 - $8.00 x ($800.00 / $10.00 - $800.00 / $8.00) =
= $800.00 - $8.00 x (80 - 100) =
= $800.00 - $160.00 =
= $640.00
The prevailing interpretation under ASC 606 supports the Fixed Dollar Amount Approach, where changes in token price do not impact the transaction price or recognized revenue. However, if the contract terms or other factors suggest variability in the token quantity beyond just price changes, further judgment may be required to assess whether adjustments to the recognized revenue are necessary.