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The contract with the customer

Arrow Software Company enters into 100 separate contracts with its customers to provide 1 year of database maintenance services for $1,000 per contract. The terms of the contracts specify that at the end of the year, each customer has the option to renew the maintenance contract for a second year by paying an additional $1,000. Customers who renew for a second year also are granted the option to renew for a third year for $1,000. Arrow Software Company charges significantly higher prices for maintenance services to customers that did not initially sign up for the maintenance services. The annual maintenance service would be $3,000 in year 2 and $5,000 in year 3 for customers that did not initially purchase the renewal service or allowed the service to lapse.

Consideration in determining whether a customer received a material right/separate performance obligation

 The customers would not have received the renewal options had they not entered into the contracts with Arrow Software Company.

 The price for the database maintenance services would be significantly higher in years 2 and 3 without the initial purchase of the renewal service

Conclusion

Arrow Software Company would conclude that the renewal option in its contracts with customers provides a material right that the customers would not receive without entering into the contracts because the price for maintenance services would be significantly higher had those customers not initially elected to purchase the database maintenance services for years 2 and 3. Therefore, Arrow Software Company would conclude that the promise to provide the renewal option is a separate performance obligation.