Material Right
A material right is an option granted to a customer to acquire additional goods or services in the future at a discount or for free, which the customer would not receive without entering into the current contract.
Revenue Recognition
Explanation
If an option provides a material right, it is a separate performance obligation. Part of the transaction price is allocated to it and recognized as revenue when the option is exercised or expires.
Typical examples:
• discounts on future purchases that exceed the discounts normally offered,
• loyalty points or credits,
• renewal options at prices below the standalone selling price,
• free products or services offered for future periods.
Options to buy additional goods at their standalone selling price are not material rights.
The SSP of a material right is estimated, considering the discount the customer would receive and the likelihood that the option will be exercised.
Why It Matters
Material rights are easily overlooked because they do not appear as separate items on an order or invoice. In SAP Revenue Accounting and Reporting (RAR), they can be represented as additional performance obligations that receive an allocation and are released when exercised or expired.
Related Terms
Performance Obligation · Standalone Selling Price · Allocation · Contract Liability
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• The 5-Step Model of IFRS 15 / ASC 606 Explained for SAP Teams
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