What is a Material Right?
As per the newly adopted Revenue Accounting Standard, ASC 606, A material right is an option to purchase additional goods or services at a price that is less than what the customer would have paid if they had not entered into the contract. If this right exists in the contract, then it should be accounted for as a separate performance obligation.
Simply put, it’s any additional right to purchase, a purchaser acquires, to purchase additional quantities at reduced prices.
Guidelines to check whether a sale qualifies as a Material Right:
For example, a generic company, company A sells AMC for a single year to a customer, Customer A for $1200. The contract states that the customer may extend the contract for a further one year at an extra cost of only $600. Let’s assume the Fair Value of the extended AMC is $600. Based on this information, the price to buy this right has to be factored in while selling the AMC and is to be accounted for as the value of the material right.
In the example considered above, we can conclude based on the flow chart that it is a case of Material Rights since it does not satisfy any conditions of “Not an MR”. Now, the Sales Price of the AMC is $1200.
Calculation of AMC Contract allocation example:
Fair Value of AMC:
[$1200/($1200+$600)*$1200] = $800
Material Right Allocation:
[$600/($1200+600)*1200] = $400.
How does NetSuite handle Material Rights?
NetSuite, through its Revenue Management System, Advanced Revenue Management Module, can address the testing scenario. NetSuite’s native Revenue Management System, ARM, along with NetSuite’s robust Upsell Manager can bring in additional revenue lines to a sales order. Along with the Merge functionality, all the functions work in tandem to help you achieve the correct results seamlessly. The allocations happen, either prospectively or retrospectively, as per your requirement.
Revenue Arrangement for the AMC:
Revenue Arrangement for the Material Rights for AMC:
Merged Revenue Arrangement:
After merging the Revenue Arrangement, the revenue allocation is $800 for the Annual Maintenance Charges and $400 for the material Rights. Thus, our calculation corroborates NetSuite’s calculation.