Under ASC 606 and IFRS 15, a Material Right represents a customer option to acquire additional goods or services at a price that is significantly lower than the standalone selling price (SSP) — essentially providing the customer with an economic benefit that would not exist without entering into the contract.
When this type of benefit is offered within a product or service SKU (Stock Keeping Unit), it triggers the creation of an Implied Performance Obligation (IPO) in Oracle Revenue Management (RMCS) or similar systems.
🔍 What Is a Material Right?
A Material Right exists when:
- The customer receives a discount, credit, or incentive toward future purchases that is material in value.
- The right extends beyond the current transaction and obligates the company to provide future goods or services.
- The option gives the customer an advantage they would not have received if they had not entered into the original contract.
Examples of Material Rights:
- Subscription Discounts:
A customer purchases a 1-year software subscription and receives an offer to renew for the second year at 50% of the list price.
→ The renewal discount represents a material right, as it gives the customer a significant economic benefit in the future. - Hardware + Maintenance Bundles:
A customer buys hardware (HW) and receives a heavily discounted maintenance contract for year 2.
→ The discount for future maintenance constitutes a material right. - Loyalty or Credit Programs:
Points or credits redeemable for future purchases at a preferential rate — for example, “buy 10 training sessions and get the 11th free.”
→ The free session (or credit) is a material right. - Multi-Year Term Discounts:
A telecom contract gives a customer a locked-in rate for renewals over multiple years that is lower than the current market rate.
→ The customer holds a material right for those renewals.
⚙️ How Material Rights Lead to Implied Performance Obligations
In Oracle RMCS, Material Rights are modeled through Implied Performance Obligation Templates.
When RMCS processes a sales order or billing data containing such SKUs, it automatically derives additional performance obligations.
System Logic Overview:
- Identify Material Right SKU:
The SKU setup (in Product Master or Revenue Management rules) includes a flag or rule indicating that this item grants a Material Right (e.g., “Discount on Future Purchase”). - Derive Implied Performance Obligation (IPO):
When the contract is identified, RMCS checks for any lines that carry this material right flag or meet rule-based criteria (e.g., discount thresholds).
The system then creates a new implied performance obligation automatically, even if the sales order or billing data did not explicitly include that line. - Allocate Transaction Price:
RMCS allocates a portion of the total transaction price to this implied performance obligation, representing the expected future obligation to honor the right. - Recognize Revenue:
- The allocated amount is deferred until the customer exercises the right or the option expires.
- If the right is exercised (e.g., the customer buys the discounted renewal), the deferred revenue is recognized.
- If it expires unused, the deferred balance is recognized as revenue at expiration.
🧮 Example — Material Right and Implied Obligation Derivation
| Scenario | Details |
| Order | Customer buys Product A (HW-100) for $1,000 and receives a 30% discount on future Subscription B for one year. |
| Material Right Identification | SKU HW-100 has a defined “Material Right” for future subscription (SKU SUB-B). |
| Implied Obligation Creation | RMCS automatically creates an Implied Performance Obligation for the discount value (30% of SSP of SUB-B). |
| Price Allocation | Total Transaction Price = $1,000 → $950 allocated to HW-100, $50 allocated to the Implied Performance Obligation (discount right). |
| Revenue Recognition | $950 recognized at shipment; $50 deferred until customer exercises the right or option expires. |
🧩 Typical Scenarios Where Implied POBs from Material Rights Arise
- Renewal Discounts – e.g., “Buy 1 year, get next year 50% off.”
- Free or Discounted Upgrades – e.g., free software updates or version upgrades.
- Training or Service Credits – e.g., “Includes 10 free training hours.”
- Extended Warranty or Maintenance Extensions – e.g., free additional 3 months of coverage.
🧠 Key Takeaways
- A Material Right is not just a marketing discount — it is an accounting obligation that must be tracked and deferred.
- Implied Performance Obligations ensure compliance with ASC 606 / IFRS 15 by recognizing revenue only when the right is exercised or expires.
- Proper SKU setup (including identifying material rights) is crucial to automate IPO creation in systems like Oracle RMCS.
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